It's only a matter of time before states start taxing Internet sales, advocates say.
Supporters of an Internet sales tax quietly celebrated when a key House Republican recently signaled support for the idea. The decade-long effort had already gained more traction than ever before when the Senate passed the Marketplace Fairness Act earlier this year, and while nothing is guaranteed in this Congress, the bill has the wind at its back.
“If it doesn’t pass this Congress, it’ll pass next Congress,” said Max Behlke, a lobbyist for the National Conference of State Legislatures, a nonpartisan advocate for statehouses nationwide. “It’s not a question of if, but when.”
House Judiciary Committee Chairman Bob Goodlatte, R-Va., recently released parameters for a Republican version of an Internet sales tax. The measure would require online retailers to collect sales tax in states that pass levies on digital purchases. As it stands, only businesses with a physical presence in the state of the sale must charge the tax.
Despite his decision not to take up the Senate bill, Goodlatte's initial demands appeased advocates, which include states, localities and traditional brick and mortar stores. The sponsor of the Senate bill, Sen. Mike Enzi, R-Wyo., is encouraged by Goodlatte's proposal as well, his office said.
“His principles highlight that there is a problem to be addressed and leveling the playing field for all businesses is possible,” an Enzi spokesman said.
Goodlatte wants states to keep the sales tax the same for all purchases, whether made digitally or in person, and would bar the federal government from requiring states to collect an online tax.
Consumers who buy goods online are technically required to pay the sales tax in their annual filings, but few people know this, leaving states with $23 billion in uncollected taxes a year and turning millions of Americans into accidental scofflaws.
Opponents of the measure, including eBay and Americans for Tax Reform, say it is burdensome for businesses to have to comply with tax laws of all 50 states. Minnesota might not tax a scarf if it’s considered essential clothing, but Florida might tax it as an accessory. There are thousands of discrepancies like that among state tax codes.
The Senate bill attempts to handle the issue by exempting businesses with out-of-state sales under $1 million, eliminating the problem for stores with less manpower and resources to sort through the varying tax codes. But Goodlatte is against the small business exemption, insisting that the final bill should not create regulatory nightmares for any business.
Behlke said today’s software is so advanced that most of the work should be automated, and states would give it to businesses to use for free.
States are taking different approaches to the expected windfall of cash. Wisconsin's Republican Gov. Scott Walker said the money should be used to reduce the state income tax rate, while leaders in Maryland and Virginia have earmarked the money for transportation projects. Others don't plan to levy the tax at all.
As more purchases shift to the Internet, Behkle said it will be necessary to give states the flexibility to recoup the lost revenue from traditional sales. Internet sales make up only 5.8 percent of all sales, according to the U.S. Census, but that share is increasing every year.
“States are forced to do one of two things: raise taxes somewhere else or eliminate programs,” he said. “Not only can it be used to lower taxes, it can be used to prevent future tax increases.”