Congress Considers Taxing Internet Sales
WASHINGTON – A pair of L.L.Bean blue jeans costs 5 percent more when shipped to a customer in Maine than to one in New Hampshire . That’s because the clothing company does not have to collect sales taxes when it ships to any of the 46 states where it doesn’t have a retail store, including New Hampshire .
But that might be about to change.
Bipartisan legislation in Congress would force companies to collect sales taxes on behalf of any state they ship to even if the merchandise was ordered by mail, by telephone or through the Internet.
New Hampshire is one of only five states without a sales tax, but the indirect reverberations of an Internet sales tax could nevertheless affect its residents and companies .
“If you live in New Hampshire and you’re buying from a seller and sending it to a relative in California , you’ll have to pay California sales tax,” said Mark Micali, vice president of government affairs at the Direct Marketing Association.
New Hampshire-based companies like Brookstone and J. Jill would have to collect sales taxes when they shipped products out of state, even to states where they had no stores.
Micali said an Internet sales tax is unfair to out-of-state retailers. “We have very vigorously opposed it for quite a while,” he said. He added that businesses are put at a disadvantage in tax disputes when they have to plead a case where they have “no presence and no political clout.”
“If you go to a foreign state, you’re really nobody there,” he said.
Under current law, whether customers pay sales taxes in online transactions varies from merchant to merchant. Micali said that because J.C. Penney has stores in every state, every remote purchase—online, mail-order or phone—from the company is taxed. But Amazon.com rarely charges sales taxes because it has no stores.
Supporters of the so-called Internet sales tax say it’s not really a new tax, but rather increasing enforcement of laws already on the books.
“Our position is that the legislation is already there,” said Jacquelyn Byers, director of research at the National Association of Counties. Many counties levy sales taxes.
Enforcing taxes on online purchases might discourage some people from buying online, but the Internet’s main advantage over local retail shopping is convenience, not price, Byers said.
A small price increase for the consumer could make a big difference for the states that would receive the money. As increasing proportions of retail purchases are bought online, states worry that without an Internet sales tax, they will lose more and more money. And with states’ continuing budget crises, new income streams are welcome.
“Somewhere between $3 billion and $5 billion of revenue has been lost since the boom in Internet sales in the past five to seven years,” Byers said. “It’s a phenomenal amount of money.”
Byers also discounted concerns that new tax-collecting responsibilities would mean headaches for businesses. “It’s a single piece of software,” she said, referring to programs that can help companies keep track of what sales tax they need to collect and submit to each state. Byers said, “It’s a much easier job to collect this tax than people think it is”
States are already working to simplify their sales tax guidelines and make it easier to keep track of which taxes are owed.
At the Multistate Tax Commission, a joint state agency that deals with interstate commerce, executive director Dan Bucks said that once tax codes are simplified, they should be made “equitable” for local and remote sellers. When online sellers don’t have to collect sales taxes, their prices can be slightly lower, leading to what Bucks calls “an unfair advantage” over sellers down the street.
In 1992, the Supreme Court said that if states simplified and standardized their tax codes, Congress could give states new authority to tax interstate commerce—authority that would cover businesses not physically located in their jurisdictions.
Bucks said, “The assumption is that [remote sellers] have a collection cost disadvantage over local sellers” because it’s more complicated for them to calculate, collect, and submit sales taxes for out-of-state locales. States couldn’t tax Internet sales in the past because “remote sellers had to be protected” from the higher cost of collecting, he said.
Bucks said that because simplification of tax codes has eliminated the collection cost disadvantage, states should be able to level the field for local sellers to compete with remote sellers.
Rep. Charles Bass (R-N.H.) is “categorically, unequivocally opposed to the bill and opposed to allowing other states to impose their sales taxes on New Hampshire consumers, and equally opposed to allowing other states to force New Hampshire businesses to collect sales taxes for them,” said spokesman Tad Furtado.
“It’s an issue we’ve been working on for a long time, and the congressman feels very, very strongly about it,” he said.
Furtado discounted tax code simplification as a rationale for taxing remote sales. “Even if every jurisdiction in the country had a 5 percent sales tax, it would still take an act of Congress” to let them collect out-of-state taxes, he said.
Although the current legislation would allow “point-of-destination” states to collect the taxes, “point-of-origin” sales taxes have also been discussed by proponents of the tax, Furtado said. Under that kind of law, states could collect sales taxes from their own businesses that sold products to out-of-state customers, but not from businesses in other states.
“You wouldn’t need a federal law to pass a point-of-origin Internet tax law,” Furtado said, adding that Bass opposes any form of Internet taxes. Instead of point-of-origin, he said, states are interested in point-of-destination because it would let them collect taxes from businesses they’re not accountable to.
“It’s just not right for states to export their taxes,” he said. “We think that there’s value in tax competition.”
Furtado said that an Internet sales tax might even lead—someday—to a sales tax in New Hampshire if the new tax caused too much money to leave the state. New Hampshire ’s lack of a sales tax means the state would not see any money from an Internet sales tax.
G. Philip Blatsos, commissioner of the New Hampshire Department of Revenue Administration, said that although the proposed law wouldn’t affect New Hampshire ’s tax structure or revenue stream, it would have “a detrimental effect” on New Hampshire businesses because it would penalize the five states without sales taxes.
In Concord , Charlie Arlinghaus, president of the Josiah Bartlett Center for Public Policy, agreed that an Internet sales tax wouldn’t help consumers. “I don’t ever trust the government when they say they’re going to simplify my taxes,” he said. The center is a free-market think tank.
Arlinghaus said the Internet sales tax is “government in search of more money, rather than making economic sense.”
“You raise taxes on anything and you get less of it. There’s no advantage to that. One of the advantages of not having an Internet tax is that it creates an economic incentive for people to lower taxes” in stores, Arlinghaus said. “For example, people shop in New Hampshire and not in Massachusetts because there’s no sales tax in New Hampshire … Internet taxes is the same thing.”
The bill before Congress exempts small businesses with less than $5 million nationwide in remote sales from sales tax collection. But Arlinghaus said the exemption wouldn’t help. He said its very presence “acknowledges that there is an economic burden involved in the collection of the taxes. What we’re saying is that if your company is big enough, we don’t care about your economic burden…and that’s a silly distinction.”
Bucks, at the Multistate Tax Commission, disagreed. “The small-business exception recognizes the fact that it’s more costly for small business to collect the sales tax than larger businesses,” he said. “But once the business grows to the point where the cost is not material to their operations, then they should collect the sales tax. The economic incentive for a company to grow is greater than any sales tax burden.”
