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Internet Sales Tax: Democrats, Republicans Support Closing Loophole

Amazon Fulfillment Center

First Posted: 12/01/11 11:27 AM ET Updated: 12/01/11 03:06 PM ET

State governments, pushed to the brink of default, may finally get their way in a battle with Amazon.com. At a congressional hearing Wednesday, representatives of both parties seemed to support a bill that would close a loophole that allows online-only retailers to avoid collecting sales tax.

The bill, known as the Marketplace Fairness Act, comes at an opportune moment. Municipal bankruptcies are gripping cities like Central Falls, R.I. and many government workers are in jeopardy of losing their pensions. Democratic and Republican lawmakers are trying new ways to fill the $102.9 billion state deficit predicted for 2012 by the left-leaning Center on Budget and Policy Priorities.

Online sales tax revenue could fill up as much as 11 percent of this deficit, according to a 2009 University of Tennessee study that estimated states would lose $11.39 billion from untaxed online sales in 2012.

As Rep. John Conyers (D-Mich.) noted at the hearing, Michigan will lose $450 million in the fiscal year of 2013 from lost tax revenue. This loss is reflected in reduced school programs, bridges and roads, and neglected services for police and firefighters, he said.

The bill has bipartisan sponsorship -- a rarity for a tax proposal in this political climate -- and even gained the support of Amazon itself in early November. Amazon's competitor eBay is the bill's largest remaining opponent. At the hearing, executives from eBay and Overstock.com formed a united front, lobbying on behalf of online sellers who they say would be disadvantaged by the bill.

Amazon Flips

When the Supreme Court made the 1992 decision Quill Corp. v. North Dakota, which currently exempts some online-only retailers from collecting sales tax, Amazon was simply a river in Brazil. The World Wide Web was still a year away from being introduced to the public, Amazon Vice President of Global Public Policy Paul Misener noted at the hearing.

A few years later when e-commerce was born, no one thought that small, west-coast startups like eBay and Amazon should have to collect taxes in all 50 states. The retailers went by the 1992 Supreme Court ruling that said catalog businesses only had to collect taxes in places where they had "physical presences."

Today, websites like Walmart.com do collect sales tax, as they are linked to a physical network of stores. But online-only stores like eBay or Overstock contend they shouldn't be burdened with the responsibility of collecting taxes in places where they don't have wholly-owned stores, warehouses or manufacturing facilities.

Shoppers are technically required to pay the sales tax even if retailers don't collect it, by reporting purchases on their tax returns. But as few as 1 percent of taxpayers actually comply, as Republican Indiana state senator Luke Kenley noted in this morning's hearing.

As Amazon grew and opened distribution centers in more states, local governments have tried to establish laws that would force the company to collect tax by redefining what it means to have a "physical presence." In some of these states, Amazon cut ties with local business partners in order to avoid collecting tax. In others, governments decided to stop pushing for the tax revenue in order to hold onto Amazon warehouses and jobs.

This year, the legal battle came to a head as California and Indiana joined the states trying to squeeze much-needed tax dollars out of Amazon. With governments near broke and e-commerce continuing to expand, a tax seemed inevitable. On November 9, the day the group of senators introduced the current bill to Congress, Amazon issued a statement supporting the act, surprising many who had been following the battle and the two similar bills introduced earlier this year.

"Part of what is happening is Amazon is moving into different aspects of online businesses. I think they're going to establish more nexus in places," said Kim Reuben, a senior fellow at the Tax Policy Center, a nonpartisan think tank. "Part of it is them recognizing that we’re moving in this direction."

"It's a win-win resolution," Amazon's Misener said in the November 9 statement. "And as analysts have noted, Amazon offers customers the best prices with or without sales tax."

Small Business Interests

Small online businesses might not weather the change as well as Amazon if the bill were passed, eBay vice president of Government Relations Tod Cohen maintained in Wednesday's hearing.

"It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity," Cohen wrote in a statement to Congress on the day the bill was introduced.

Local brick-and-mortar businesses, meanwhile, are thrilled with the bill, which they believe will help level the playing field between themselves and online businesses.

Though business interest groups are divided, from a state perspective the bill seems like a good solution. "There’s a chance it could get targeted or added to something that calls it a tax increase," says Reuben, "but the fact that Amazon is now lobbying for it makes me more optimistic."

"The part that’s sort of troubling is, why did it take 20 years to do this?" she adds.

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