Senate 'marketplace fairness' internet tax plan would require state action
This article first appeared in the St. Louis Beacon, April 26, 2013 - WASHINGTON – As the Senate moved toward May approval of the “marketplace fairness” bill, which aims to help states force online retailers to collect sales taxes, backers agreed that the plan would require action from the Missouri Legislature to have much impact in the state.
“I think this does provide the tools that the legislature needs” to modify the existing – but unenforced – Missouri state tax on internet purchases, said U.S. Sen. Roy Blunt, R-Mo., a cosponsor of the Senate legislation.
But Blunt added that the legislature “can still decide, if they want, not to be part of this system. But I think that's unlikely that Missouri would decide that.”
U.S. Sen. Claire McCaskill, D-Mo., who also supports the Marketplace Fairness Act, said it would “provide the framework of fairness” for the state’s brick-and-mortar retailers to compete with outstate internet retailers that now avoid imposing taxes. “But ultimately the decision on this lies with the Missouri legislature."
Under the bipartisan but hotly contested bill – which won a key Senate vote late Thursday to cut off debate in advance of a final vote scheduled for early May – Missouri, Illinois and other states would have the option to require the collection of sales and use taxes by out-of-state sellers if those states simplify their sales and use-tax systems.
“It will give local brick-and-mortar retailers a chance to compete on a level playing field and allow states and localities to collect much needed revenue,” said U.S. Sen. Dick Durbin, D-Ill., the prime Democratic sponsor of the Senate bill.
“Under the current tax loophole, while brick-and-mortar retailers collect sales and use taxes from customers who make purchases in their stores, many online and catalog retailers do not collect the same taxes.”
After days of negotiations with opponents to agree on a limited number of amendments to the bill, a clearly frustrated Durbin complained late Thursday afternoon that Senate critics, led by U.S. Sen. Ron Wyden, D-Oregon, were “sitting here staring at one another, hoping that we never get to a vote.”
But later Thursday, in a 63-30 vote, the Senate approved a cloture motion to end debate on the bill. Senate Majority Leader Harry Reid, D-Nev., said the Senate will vote on final passage when senators return May 6 from a recess. Durbin and Missouri's senators voted to end debate; U.S Sen. Mark Kirk, R-Ill, voted against.
Even if the bill passes the Senate - which now seems likely - it still faces debate in the GOP-led House, where its approval is not assured. Even so, Durbin said, “we want to get this done. We put a lot of effort into it.”
The stakes in the debate are high. Last year, Internet sales in this country were about $226 billion, a 16 percent increase from the previous year, the Commerce Department has estimated.
The National Conference of State Legislatures has estimated that states lost $23 billion last year because they couldn't collect taxes on out-of-state sales.
‘Brick and mortar’ stores push for sales tax equity
Among the Missouri and Illinois business owners who want to see the bill signed into law is Teresa Miller, the founder and president of Treats Unleashed, a Chesterfield-based pet supply business.
Founded in 2002, the company has about 45 employees at five retail stores in the St. Louis area, one in Columbia, and another in Kansas City.
“I’ve been watching the sales tax fairness issue for quite some time now because it certainly does affect brick-and-mortar businesses,” Miller said in an interview.
She is concerned that “customers might walk into my store, talk to me about finding the best food for their pet – because that’s what our knowledge base is about – and then they could easily go home and buy that bag of food online from somewhere outside of Missouri and be able to save 10 percent from the sales tax.”
Treats Unleashed has an online sales component, but Miller said it “caters more to our customers, providing them with the convenience they like, as opposed to buying from big-box stores. So it’s not really brick-and-mortar versus online businesses. It’s much more about equality – and not being behind the 8-ball by having to collect sales tax when my competitors online don’t have to collect it.”
Durbin said Chris Koos, a businessman who is also mayor of Normal, Ill., “has told me that it’s not unusual for someone to come into his store and ask to see a pair of running shoes, to try them on, see the different colors, and then leave without buying anything.
“Why would someone try on the shoes and not buy them? Go to the internet. In many instances it’s because many internet retailers do not collect sales tax,” Durbin said.
Opposing the legislation is a loose coalition of tax opponents, direct marketing firms and financial industry trade groups that contend that the bill has flaws.
In a letter to senators, Grover Norquist, who heads the anti-tax Americans for Tax Reform, alleged that the bill would lead to a “massive expansion of tax authority.”
But Durbin, Blunt, McCaskill and other backers of the bill say that’s not true. “I think that many people in Missouri believe we are passing a tax. We’re not,” McCaskill told reporters Wednesday. “That would be up to the Missouri Legislature.
“This is really about a framework of fairness. This is about saying that small businesses in Missouri that have brick and mortar buildings – that they should not be required to charge sales tax while Amazon.com can come in and sell to Missourians with no sales tax.”
Blunt, who often takes the same stand as Norquist, said that “this is not a new tax, and it’s not a move to allow government to use the internet for a source of revenue – which I oppose. This is simply a fairness issue to give states a chance to collect sales tax they are already owed in the way that works best for them, if they choose to do so.”
But U.S. Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, said he opposed the bill because it is “full of unintended consequences” that could, in the end, be “bad for business and bad for jobs.”
Kirk voted against Thursday's cloture motion and voted no earlier this week when the Senate voted 74-20 to advance the bill to further debate. But last month, Kirk had voted for a non-binding budget amendment that expressed support for the Marketplace Fairness concept.
The legislation’s cosponsors include 30 Republicans and Democrats in the Senate and 56 Republicans and Democrats in the House. Twenty-two governors (15 Republicans and seven Democrats) back the bill, as do nearly 300 business, labor and government groups.
Illinois ahead of Missouri in collection efforts
Last year, Illinois Gov. Pat Quinn signed a bill that broadened the requirements for online merchants to collect sales taxes from Illinois consumers in cases where the online company has a “physical presence” in the state.
But state laws are difficult to enforce for interstate commerce, and some of them tend to encourage internet sales firms to shift their operations to other states to avoid taxes. Several court challenges have been raised against various state taxation laws.
Missouri has had a state sales tax law on the books for years that in theory applies to internet sales, but it has not been enforced. The Truman School of Public Affairs at the University of Missouri–Columbia estimated last year that the state has lost about $468 million a year in tax revenue from online sales during the past decade.
“Last year, about 300 Missouri people put on their tax return that they had received a product through the mail that they ordered online, and they needed to pay a tax on that -- and submitted whatever they thought that tax was going to be,” said Blunt.
“This is a tax that's currently due. One of my objections to the current system is that I think it's a bad idea to have laws on the books that everybody expects people not to obey.”
Asked about what the Missouri Legislature might do, Blunt told reporters: “They should either eliminate the law that says people are supposed to do this, or figure out a way that they can do it. What this [Senate bill] does is allow that [tax] collection.”
The main “catch” in the Senate bill’s provisions giving states the authority to compel online retailers to collect sales tax at the point of transaction is this: States are only granted this authority after they have simplified their sales tax laws (to make multistate tax collection easier for online retailers).
There are two options for states to simplify their existing sales tax laws in a way that would give them “collection authority” under the Senate bill:
One would be to join the 24 states that have already voluntarily adopted the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA), which has been developed over the last decade to simplify the collection of sales taxes.
The other main option is to pass state laws that meet the bill’s requirements for simplification. Those include:
Notifying retailers in advance of any state tax-rate changes;
Designating a single state organization to handle sales tax registrations, filings and audits;
- Establishing a uniform sales tax base for use throughout the state;
- Using “destination sourcing” to determine sales tax rates for out-of-state purchases (so that a purchase made by a consumer in Missouri from an Ohio retailer would be taxed at the Missouri rate, and the collected tax would be sent to Missouri); and
- Providing free software for managing sales tax compliance.