U.S. Internet Sales Tax Bill Moving Forward

Two bills recently submitted to the U.S Senate could radically shakeup the American tax system. The Streamlined Sates and Use Tax Agreement calls for the mandatory collection of sales tax by Internet and catalog retailers. Currently, only businesses with a physical presence or "nexus" within a state are required to collect taxes for the jurisdictions within that state.

Though 19 states have already agreed to simplify the collection of sales tax across state borders, the legislation is causing disagreement among some of the larger trade organizations.

“The states have acted. It is now time for Congress to provide states that enact the Streamlined Sales and Use Tax Agreement with the authority to require remote retailers to collect sales tax just as Main Street retailers do today,” said Michael Enzi (R, WY) who along with Byron Dorgan (D, ND) introduced the legislation. "Simply put, if Congress continues to allow remote sales taxes to go uncollected and electronic commerce continues to grow as predicted, other taxes, such as income or property taxes, will have to be increased to offset the lost revenue to state and local governments. I want to avoid that,” said Enzi.

The National Retail Federation (NRF), which represents bricks-and-mortar retailers, as well as e-tailers, has worked with the Streamlined Sales Tax Implementing States (SSTIS) organization for more than two years to simplify sales tax systems across the nation. NRF helped draft and strongly supports the SSTIS agreement reached in November.

Maureen Riehl, NRF vice president and government and industry relations counsel contends that “online and other mail-order merchants who don’t have to collect sales tax have an unfair price advantage over local bricks-and-mortar stores.” The NRF, she says, support[s] a level playing field for all merchants, regardless of whether they sell their merchandise from a storefront, through a catalog or over the Internet. All retailers should be required to play by the same rules.”

Riehl insists that the amount of revenue generated by the tax is irrelevant. What is important, she says, is to end the unfair advantage that e-tailers have over other merchants, who do have to collect sales tax.           

Riehl also hopes that the new legislation will alleviate some of the confusion of the current system. In addition to the 45 states that collect sales tax, there are approximately 7,600 local jurisdictions that collect sales tax, with widely varying rates, lists of taxable items and definitions of taxable items. “A belt might be considered clothing in one jurisdiction but a ‘fashion accessory’ in another, while some jurisdictions tax fashion accessories but not clothing, and others do the opposite,” she says. “The sales tax simplification process is intended to reduce this kind of confusion and make it more practical for a retailer in one state to know what sales tax to charge a customer in another state.”

The Direct Marketing Association (DMA), a global trade association of business and nonprofit organizations using and supporting direct marketing tools and techniques, opposes the bill. It claims that rather than streamlining the current system, the legislation would only serve to add a new layer of complexity, expense and burden for large and small businesses around the country.

"Efficiency, simplicity and results are the ultimate goals of both business and government operations. Neither these legislative efforts, nor the voluntary agreement upon which they are based, accomplish these goals," said the DMA president and CEO John A. Greco, Jr. "True sales tax simplification would require states to adopt standardized definitions and offer a single tax rate per state for all types and channels of commerce."

A key complaint leveled by the DMA against the proposed system is that neither of the bills offers a reduction in the 7,600 tax jurisdictions currently operating in the U.S.

The DMA also cautions that the legislation would create a barrier to entry for small entrepreneurs, who rely on the Internet to help create markets, and impinge on the expansion of medium-sized businesses. They claim that many would be unable to afford the effort or the expense of collecting and remitting sales taxes, nor the cost of a possible audit at any time by 46 different state revenue departments (45 states plus DC impose sales tax).