States will be authorized to tax online sales if Congress passes Marketplace Fairness Act
Illinois currently loses an estimated $200 million a year in sales tax revenues to Internet sales, and the U.S. is losing $24 billion annually. If the Marketplace Fairness Act of 2013 passes the House, President Obama will sign into law a measure that many say will even the playing field between brick-and-mortar and Internet retailers.
The legislation (S. 743), which sailed through the Senate by a margin of 69-27 on May 6, would require online sellers earning more than $1 million in annual revenues to begin collecting sales taxes from every state in which the Internet seller does business, regardless of where the company’s physical presence is based. The act has 66 sponsors in the House, but Speaker John Boehner (R-Ohio) is expected to oppose the bill (H.R. 684) in its present form once it reaches the floor. At press time, the legislation was in the House Committee on the Judiciary.
The Marketplace Fairness Act of 2013 comes on the heels of individual states’ measures to collect online sales tax revenues. In March 2011, Illinois Gov. Pat Quinn proposed such legislation requiring in-state, online retailers to collect and remit sales taxes on purchases made by Illinois residents, but it was overturned in circuit court. The proposed Illinois Main Street Fairness Act would have expanded the meaning of “physical presence” beyond a warehouse, factory or office to include affiliate companies, deal and coupon Web site operators that earn commissions for directing shopping traffic to an online store. However, in Illinois, online customers still owe an online sales tax of 6.25 percent – even if the online retailer doesn’t collect it, although few voluntarily pay it via the designated line on their income tax return.
Illinois is among a handful of states including New York, Rhode Island and North Carolina that have instituted similar laws to extract sales taxes from online merchants and boost depleted state coffers.
But state laws are difficult to enforce for interstate commerce, critics say; 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.
Ralph Martire, executive director of the Center for Tax and Budget Accountability in Chicago, is a proponent of the Marketplace Fairness Act, saying the time has long since come for online retailers to be treated the same as feet-on-the-ground retailers.
“This evens the playing field between competitive businesses, no longer disadvantaging businesses with brick and mortar. Why wouldn’t you have this law?” Martire said.
Peter Gill, spokesman for the Illinois Retail Merchants Association, says the 1992 U.S. Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales in states where they did not have a physical presence is archaic, and that Internet commerce is exponentially larger today. This legislation is sorely needed, he says.
“Obviously, things have changed in the marketplace over the past 20 years,” said Gill. “Brick-and-mortar retail merchants have been creative and have been able to overcome a lot of challenges through some really tough times, but this barrier is discriminatory. Where you’re buying shouldn’t be an issue. A tax is a tax. We always say, ‘The tax is due and owing.’ When you go into a store, that (sales) tax is added on automatically. People can leave the store, immediately go to their smartphone and buy the same pair of shoes via the Internet right now without having to pay a sales tax. It’s just not right.”
Gill says that if the Marketplace Fairness Act isn’t passed soon, many local retailers – vendors who are already just hanging on through tough economic times – will have to shut their doors, as has already been the case, due to Internet-based competition. And when a local merchant goes out of business, a community loses more than a place to shop, he adds.
“If the stores aren’t able to remit as much in sales tax revenue, the municipality in which they’re based doesn’t receive as much in public services from state sales tax funds,” Gill said. “It hurts not only the retailers, but also the people who live there. When that sales tax is collected by the store, it is remitted by the state and goes to help local taxing districts. If suddenly tomorrow there were fewer sales taxes collected, local governments would be asking, ‘How are we going to pay for our fire trucks and our street maintenance?’ Your local retailers often sponsor the Little League team, donate goods for the fundraiser and hire your son or daughter for that part-time job. The more we take away from our local brick-and-mortar retailers, the more it impacts the local community.”
U.S. Senator and Assistant Majority Leader Dick Durbin (D-Illinois) is one of 28 co-sponsors of S. 743 and was one of the 69 affirmative votes on May 6. Durbin says the bill has the support of more than 268 labor, business and government organizations and 22 governors (15 Republicans, 7 Democrats).
“Under the current tax loophole, while brick-and-mortar retailers collect sales and use tax from customers who make purchases in their stores, many online and catalog retailers do not collect the same taxes,” said Durbin. “This act would give states the option to require the collection of sales and use taxes already owed under state law by out-of-state businesses, rather than rely on consumers to remit those taxes to the states, which is the method of tax collection to which they’re now restricted.”
Etsy, an e-commerce Web site that sells handmade and vintage items as well as art and craft supplies, launched in Brooklyn in 2005 and reports annual sales of $300 million. Althea Erickson, its director of public policy, says Etsy and other large online retailers – including Amazon – have ultimately come out in support of the concept of the Marketplace Fairness Act now that it exempts smaller vendors. The site functions somewhat like a virtual craft fair.
“We at Etsy support the intent of the legislation, to help states reap the tax they are owed, but feel it will unnecessarily burden small businesses,” Erickson said. “Most Etsy sellers work from home and don’t have the administrative resources to comply with the law. That’s why the ‘small seller exception’ included in the bill is so important. We believe in pushing that exception as high as possible, not only to protect sellers now, but to give their businesses room to grow down the line. Currently, the bill exempts businesses who earn under $1 million annually, though the level of exception is hotly debated, and some companies have even argued to eliminate it altogether. If you’re thinking, ‘$1 million, phew, that excludes me,’ that’s understandable. $1 million in sales, however, is well below other federal definitions of small business. And the top 500 largest Internet retailers make up 93 percent of lost state revenues. A lower exception hurts small businesses more than it helps states,” she added.
The American Enterprise Institute is one of a healthy list of organizations in opposition to the legislation. Benjamin Zycher, AEI visiting scholar, says the standard brick-and-mortar argument itself doesn’t hold water. “Brick-and-mortar sellers and their customers demand local government services, said Zycher. “Obvious examples are police and fire protection. The same is not true for out-of-state sellers and their in-state customers, who do not demand services from the local governments in the context of these particular transactions. In other words, local customers do not demand services tied to their out-of-state Internet purchases.”