A Senate committee held a hearing Wednesday to discuss legislation requiring Internet retailers to charge their out-of-state customers sales taxes.

Ever since the Supreme Court’s 1992 decision in the case of Quill Corp. v. North Dakota, states have been prohibited from collecting sales taxes from online retailers who do not have a physical presence in their state. As a result, local retailers who compete with online companies are often at a 6 to 10 percent price disadvantage, and state and local governments are deprived of billions of dollars in revenue.

Bipartisan legislation co-sponsored by committee chairman Jay Rockefeller, D-W.Va., is pending in the Senate that would eliminate this price disadvantage on local retailers and provide states with the ability to enforce their existing state and local sales and use tax laws in a manner that does not unduly burden e-commerce (see Senators Introduce Online Sales Tax Bill). The bill, known as the Marketplace Fairness Act, is co-sponsored by Senators Dick Durbin, D-Ill., Lamar Alexander, R-Tenn., and Mike Enzi, R-Wyo.

“There is a growing bipartisan consensus around the country that Congress should address this issue,” said Rockefeller in his opening statement. “In West Virginia we are fighting to keep our small towns vibrant. We need local retailers to make that happen. I believe we can have both a vibrant Main Street economy and e-commerce businesses. And, let’s be honest, allowing states to collect sales taxes on online purchases will not stop the growth of e-commerce. But, no matter where or how the purchase is made, our communities need the revenue from these sales to fund basic functions of government. That is only right.”

A representative from e-commerce giant Amazon.com testified in favor of the bill. Paul Misener, vice president for global public policy at the Seattle-based etailer, said the legislation would provide a nationwide framework. “Amazon has long supported an even-handed nationwide framework for state sales tax collection, and only Congress may create this framework,” he said in his prepared testimony. “To this end, Amazon believes that Congress should authorize the states to require out-of-state sellers to collect the sales tax already owed, and we strongly support enactment of S. 1832, a bipartisan bill already before the Senate.”

Steven Bercu, the co-owner of BookPeople, an independent bookstore in Austin, Texas, told the committee that the bill would end the unfair advantage that online retailers have over traditional stores and level the playing field. “Currently, many online retailers are exercising a business model that encourages tax avoidance by consumers as the online retailers fail to collect and remit sales tax,” he pointed out. “This provides them with an unfair advantage over brick-and-mortar stores as traditional Main Street stores must collect sales tax at the point of purchase every day, and for orders they take via their e-commerce sites. As a result, remote online retailers receive a government-sanctioned price advantage of up to 10 percent in many states.”

He contended that online retailers encourage a behavior known as “showrooming,” in which consumers spend the time and resources of brick-and-mortar stores to inform themselves about products, and then make their actual purchases online to avoid paying the sales tax.

“I have had the misfortune to observe this in my store many times, but what is somewhat discouraging in a small-ticket environment like mine becomes cause for apoplexy in big-ticket worlds,” said Bercu. “Peers of mine have spent hours explaining every aspect of various cameras and other electronic gadgets only to have the customer tell them they intend to buy online to save the hundreds of dollars due in sales tax. A friend with a jewelry store tells me he loses over $2 million per year in sales to the Internet to avoid sales tax. We can all compete on price and match any price offered online, but we cannot sell without collecting the sales tax. This Act would level that playing field.”

Scott Peterson, executive director of the Streamlined Sales Tax Governing Board, talked about how the 24 states that have signed on to the Streamlined Sales and Use Tax Agreement have been able to automate sales tax collections. Under the proposed legislation, states that voluntarily become member states of the Streamlined Sales and Use Tax Agreement, or SSUTA, would be able to require remote sellers to collect and remit sales and use taxes after 90 days.

“For a long time retailers have worked to automate every aspect of their business, including their sales tax obligations,” said Peterson. “Sales tax automation can be as simple as knowing what is the sales tax rate at any location or as complicated as knowing that a state has a 48-hour sales tax holiday on back-to-school supplies. The Streamline states enhanced the ability of retailers to automate sales tax collection by adopting uniform sales tax rules, such as defining what products are included in a back-to-school sales tax holiday, by evaluating and then certifying the accuracy of the tax answers provided by software companies, and by paying those companies to provide accurate answers and to file the tax returns and pay the tax. The Streamline certified software companies allow a retailer to automate and outsource their sales tax work. In addition each Streamline state pays the certified software companies to provide that service to retailers who do not have a physical presence in their state.”

Arguing against the law was Steve DelBanco, executive director of NetChoice, a coalition of e-commerce and online companies, including eBay, Expedia, Facebook, LivingSocial, NewsCorp, Overstock, VeriSign and Yahoo. He contended that the Marketplace Fairness Act would impose new tax burdens that are “uniquely complex and far more unfair than the current Quill standard of physical presence.” DelBanco said the bill does not require nearly enough tax simplification to justify the significant new burdens on out-of-state businesses and would not be justified by the anticipated revenue, since the total potential sales tax on all e-retail is well below 1 percent of total state and local tax revenue. He argued that the new collection burdens would be disproportionately complex and expensive for small businesses.

DelBanco contended that the Streamlined Sales Tax Project has not in fact simplified the tax collection process. He pointed out that the SSTP originally promised just one sales tax rate per state, but now accommodates over 9,600 local jurisdictions, each with its own tax rates and sales tax holidays.

“Despite a decade of concerted effort, the actual simplifications achieved by the SSTP are not nearly sufficient to justify Congress abandoning its role in protecting interstate commerce,” said DelBanco. “Rather, the SSTP has shown that simplification has become just a slogan—not a standard.”

eBay weighed in on the debate with a statement from Brian Bieron, senior director of federal government relations, who did not testify. “Small business retailers using the Internet are innovators using technology to grow a business, create jobs in communities across the country, and serve consumers with a competitive alternative to the established retail giants,” he said. “A meaningful small business exemption needs to be a part of any new Internet sales tax regime to protect this important engine of growth and entrepreneurship.”

The National Retail Federation said it supported the legislation, however. “It is critical that Congress eliminate the sales tax collection discrimination that exists between brick-and-mortar and remote retailers and allow the free market to operate so all retailers can compete on a level playing field.” NRF senior vice president David French said in written testimony submitted to the committee. “The National Retail Federation has long supported sales tax fairness legislation, and we are encouraged by the momentum that is building toward a solution. Brick-and-mortar retailers are major contributors to the health of local communities and should not be placed at a disadvantage compared to remote [and online] sellers that have no local presence. This disadvantage is not created by the marketplace, but rather it is imposed by the current state of the law following the Quill decision, stifling retailers across the country.”

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