Opponents of Online Sales Tax Face Tough Battle

Tax could provide states with about $23 billion a year in additional revenue.

A loose coalition of anti-tax activists, direct marketers and financial industry trade groups has a tough task this week in overcoming bipartisan support for letting states impose sales taxes on out-of-state sellers.

Big-box retailers and state governments showed last month that they command wide backing for the levy. Now, opponents are emphasizing the potential flaws in the legislation as they try to peel away that support.

“This bill is bad for business and bad for jobs,” said Senator Max Baucus, a Montana Democrat and chairman of the Senate Finance Committee, who said the measure wasn’t ready to debate yet. “It is full of unintended consequences.”

The dispute playing out on the Senate floor this week is a clash between business interests that falls outside the usual partisan lines of fiscal policy. The result could end tax-free Internet shopping and provide states with about $23 billion a year in additional revenue.

The Senate voted 74-20 yesterday to advance the legislation. That’s similar to a 75-24 non-binding vote last month. Five senators, all Republicans, voted differently than they did in March. Tom Coburn of Oklahoma and Mark Kirk of Illinois voted no yesterday after voting yes in March. John Barrasso of Wyoming, Dan Coats of Indiana and Jeff Flake of Arizona moved in the opposite direction.

The bill’s opponents, including Grover Norquist of Americans for Tax Reform, are warning lawmakers about the risk of financial transaction taxes, dozens of simultaneous audits and the expanding reach of state officials.

The Securities Industry and Financial Markets Association said states could have an incentive to impose transaction taxes. EBay Inc. blasted an e-mail to its users, maintaining that the small-business exemption in the bill wasn’t significant enough and would lead to job losses. Retailers with less than $1 million in remote sales would be exempt.

In a letter to lawmakers, Norquist described the bill as a “massive expansion of tax authority.”

Wal-Mart Stores Inc., shopping center owners and state governments have been joined in their campaign in favor of the bill by the largest Internet-based retailer, Amazon.com Inc.

Amazon, which currently collects taxes on purchases in nine states, is expanding its national distribution network into more states. The company supports the bill because it provides an “even-handed nationwide framework,” Paul Misener, the company’s vice president for global public policy, testified at a congressional hearing last year.

 

Mail-Order Era

The measure would effectively reverse a 1992 U.S. Supreme Court decision from the mail-order catalog era. The court prevented states from applying sales taxes to transactions with sellers that lacked a physical presence in their states.

The growth of Internet shopping turned the ruling into a competitive disadvantage for brick-and-mortar retailers such as Wal-Mart and Best Buy Co. Inc.

For example, a New Jersey resident thinking about buying a $1,000 television could look at models in showrooms and then save $70 in tax by ordering the same product online -- even, as senators said, by using a smartphone to make the purchase while still inside the store.

“It’s shifting more sales onto the Internet and away from the local store,” said Senator Richard Durbin, an Illinois Democrat. “I don’t think that’s fair. We’re asking for a level playing field.”

The Senate could pass the bill as early as this week. The measure would then be taken up by the House of Representatives, where Representative Bob Goodlatte, chairman of the House Judiciary Committee, has said it has “a long way to go” before he can support it.

The lack of tax revenue from online sales has made it tougher for states to provide “police and fire protection, access to affordable health care and funding for roads and bridges,” the Office of Management and Budget said in a statement yesterday detailing the administration’s support for the bill.

“This bill would eliminate the unfair advantage currently enjoyed by big out-of-state online companies over local neighborhood-based small businesses,” according to the statement.

The retailers’ victory on the non-binding vote last month showed the difficulty for the diffuse coalition opposing the bill. Their strategy relies on differentiating that vote on the concept from a vote on the bill.

 

‘Single Sentence’

“It wasn’t the bill,” Jerry Cerasale, senior vice president for government affairs at the Direct Marketing Association. “It was a single sentence.”

For example, the bill wouldn’t prevent each state from auditing the same online retailer.

“There are some simplifications in the bill, but we don’t think they are enough,” Cerasale said. “Why don’t you have one nationwide audit?”

Baucus said the bill doesn’t provide rules for resolving disputes, doesn’t set standards for electronic filing and wouldn’t help businesses that he said would be forced to hire expensive accountants. He said his committee should get a chance to debate and amend the bill, a step that yesterday’s vote rejected.

The base of legislative opposition to the bill starts with two groups: lawmakers from the five states lacking sales taxes, including Oregon and New Hampshire, and anti-tax Republicans who say the bill represents government overreach.

Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities in Washington, said many of those arguments fall short.

Realistically, he said, states would work together to combine audits. Some online services could be subject to new taxes, such as dating services, though the taxes would have to apply equally to intrastate transactions.

“There aren’t that many services that are pure online services,” said Mazerov, whose Washington-based group supports policies that benefit low-income Americans.

The securities industry group and the Financial Services Roundtable said the issue of potential state-level financial transaction taxes deserves more study.

“It’s important for Congress to explore all the possible outcomes and costs of the proposal,” Scott Talbott, senior vice president of public policy at the Financial Services Roundtable, said in a statement.

Mazerov said the combination of states’ fiscal struggles and retailers’ experience with having customers come into their showrooms and purchase online has led to the bipartisan consensus in favor of the bill.

“It’s sort of gotten to the point where I think the proponents have kind of won the debate on the merits,” he said. “The only kind of major resistance and major question is coming from people who are looking to prevent any level of government from having any more revenue, in any way.”

The bills are S. 743 and H.R. 684.

 

Bloomberg News

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