Online Sales Taxes See New Life in Congress
As consumers continue to use the Internet to acquire goods, members of Congress are attempting to solve a quirk in tax law that is preventing states from collecting potential sales tax revenue. Bills in both the House and Senate aim to give states the authority to require out-of-state businesses selling online or through catalogs to collect taxes already owed under state law the same way local businesses do. Similar legislation failed to reach President Obama’s desk last Congress, but proponents are moving swiftly to ensure the bills remain at the top of the Congressional agenda.
During a transaction at a brick-and-mortar store, the merchant collects the sales tax owed and remits it to the state. In an online transaction, however, the merchant is not responsible for collecting the tax. In most states, the tax is still due, but the responsibility to remit it falls upon the individual purchaser. Since there is no practical way to enforce that responsibility, much of the tax revenue goes uncollected.
The U.S. Constitution grants states the right to levy taxes such as sales taxes. Online and mail order companies have not been collecting these taxes, citing the 1992 Supreme Court case Quill Corp. v. North Dakota (504 U.S. 298). This decision said that under the Commerce Clause of the Constitution, businesses must have a “substantial nexus,” commonly known as brick-and-mortar stores, in a state for that state to require them to collect sales taxes.
Supporters of marketplace fairness see it as a way to level the playing field financially against online firms that can keep lower price points because they do not have to collect and remit taxes.
“Right now, thousands of local businesses are forced to do business at a competitive disadvantage because they have to collect sales and use taxes and remote sellers do not, which in some states can mean a 5 to 10 percent price advantage,” said Sen. Mike Enzi of Wyoming in a speech on the Senate floor last November.
Marketplace fairness has seen opposition from firms that utilize online and magazine mediums for business, as well as the attorneys general from three states without a sales tax: Alaska, Montana and Oregon. These officials sent a letter in June 2013 to the House of Representatives to express their concerns that their citizens would end up paying taxes that were not levied by their legislatures.
“(A)ny state’s efforts to enforce the collection of use tax proceeds from remote sales retailers with little or no contact with the taxing authority will remain constitutionally suspect,” the attorneys general warned in the joint letter.
During the previous Congress, the Senate passed the Marketplace Fairness Act, but that bill failed to move in the House. On March 10, Enzi re-introduced S. 698, the Marketplace Fairness Act of 2015. Gaining 22 co-sponsors from both parties, the legislation is awaiting action in the Senate Committee on Finance.
Meanwhile in the House, Rep. Jason Chaffetz of Utah introduced H.R. 2775, the Remote Transactions Parity Act of 2015, attracting roughly the same number of bipartisan co-sponsors as Enzi’s bill. The bill is awaiting action in the House Judiciary Committee.
While both bills accomplish the goal of allowing states to collect and remit sales taxes from remote sellers, there are key differences, such as the approach to what is known as the “small seller exemption.” The idea is to allow small businesses an exemption from tax collection if their annual receipts from remote sales remain below a certain threshold.
The bills create different bars for exemption. Chaffetz’s bill originally would set the ceiling at $10 million for the first year of enactment, then phase in a lower ceiling of $5 million during the second year. By the start of the third year, the ceiling would drop to $1 million. Following the end of the third year, the exemption would be dropped altogether, exposing all businesses to tax collection.
Enzi’s bill would create a $1 million ceiling for small businesses in order to qualify for the exemption, and would consistently remain at that level.
Supporters of the legislation will try to pair the bills with various other legislative vehicles, as well as move them through regular order. The issue will continue to be a hotly debated topic in the coming months. How Congress solves this issue could have a significant impact on state governments and their budgets moving forward.