Lawmakers Open to Internet Sales-Tax Bill

Members of the House Judiciary Committee on Tuesday appeared sympathetic to state and retailer concerns about a loophole created by a 1992 Supreme Court decision that now allows online retailers to avoid having to collect sales taxes from out-of-state customers but struggled with the best way to address the problem.

The issue relates to the Supreme Court's ruling in Quill v. North Dakota in which the high court found that retailers can’t be required to collect sales taxes from customers in states where those businesses don’t have a store or some other physical presence. The original ruling related to catalog sales but has since been exploited by online retailers.

State officials worry that as more sales migrate to the Internet, the loss in sales-tax revenues will become huge. States are losing an estimated $20 billion in sales-tax revenues each year from the loophole, according to Tennessee GOP Gov. Bill Haslam, who testified at the hearing on behalf of the National Governors Association. At the same time, brick-and-mortar stores including big-box retailers such as Best Buy and Wal-Mart argue that the loophole gives online-only stores an unfair advantage.

States and retailers support a House bill offered by Reps. Steve Womack, R-Ark., and Jackie Speier, D-Calif., that would allow those states that simplify their state sales-tax regimes to require online retailers to collect sales tax from out-of-state customers. States would have to meet a handful of tax-simplification standards such as implementing a single sales and use tax and designating a single authority to which retailers can send the sales taxes they collect.

The bill has bipartisan support in Congress and among state government officials, including many GOP governors. “It’s an issue of fairness. Some people pay it, some don’t,” Haslam said. “I understand all the issues. It is very complex but it’s too big of an issue of fairness not to address.”

It was a concern shared by even conservative members of the committee such as Reps. Steve King, R-Iowa, and Ted Poe, R-Texas. Poe said many local retailers tell him they are increasingly losing business from consumers who may examine an item at their store but then ultimately buy it from an online retailer, which can offer it at a lower price because they don’t collect the sales taxes.

Critics, however, argued that current software still doesn’t help retailers adequately deal with the more than 9,000 taxing jurisdictions nationwide and argued for a bigger exemption for small businesses. The Womack-Speier bill would exempt small businesses with up to $1 million in gross national remote sales.

Steve DelBianco, executive director of NetChoice, which represents online opponents of the bill including and eBay, also argued that the bill needs to require states to go further in simplifying their tax rules by, among other things, streamlining definitions of what items are subject to sales taxes. “We need a bill to truly simplify,” he said.

Several lawmakers agreed more work needs to be done to make it easier for online retailers to collect sales taxes from customers across the country, but there was less sympathy for a small-business exception. Rep. Bob Goodlatte, R-Va., who is expected to vie to be the top Republican on the Judiciary Committee in the next Congress, and others questioned why small online retailers should be exempt from having to collect sales taxes on remote sales when small brick-and-mortar retailers are not.

Despite this concern, supporters of the Womack-Speier bill said they expect some sort of small-business exemption will be included in any final version of the bill. And House Judiciary Chairman Lamar Smith, R-Texas, insisted the legislation must include a “robust small-seller exception.”

Similar legislation offered in the Senate by Mike Enzi, R-Wyo., and Majority Whip Dick Durbin, D-Ill., includes a much tighter small-business exemption. It would only exempt small businesses with gross national remote sales of $500,000 a year.

The Enzi-Durbin bill has yet to move but the senators have indicated they will try to attach the measure to any bill likely to pass the Senate.