House Looks for Best Way to 'Level the Playing Field' With Online Sales Taxes

The Amazon homepage appears on a screen in Washington on September 3, 2010. (National Journal)

Tax lawyers and House members wrestled with how to best tax purchases made over the Internet on Wednesday, mulling such options as levying taxes based on the retailer's location instead of the purchaser's address.

Judiciary Committee Chairman Bob Goodlatte started by declaring that the Marketplace Fairness Act the Senate passed last year — which authorizes states to compel online businesses to pay sales taxes — is a nonstarter in the lower chamber. He went on to say he wants to start "winnowing down" alternative proposals to put online retailers on an even foothold with brick-and-mortar stores.

Currently, tax laws require businesses to have a physical presence in a state to collect sales taxes on purchases made there. Goodlatte acknowledged local businesses could be hurt as consumers take their shopping online to avoid paying sales tax.

"Many argue that unfair sales-tax laws are contributing to [the decline of traditional retailers]," the Virginia Republican said. "The committee is sympathetic to the plight of traditional retailers. It is serious about searching for a solution that the various parties can accept."

Goodlatte did not lay out a timeline for legislation, but Democrats urged quick action.

"This issue is a prime opportunity for all of us to work in a bipartisan basis on legislation," ranking member John Conyers said. "But it is imperative that we do so this year."

The Michigan Democrat said he would have preferred to mark up the Senate bill, but was pleased the issue was being addressed.

Opponents to the Senate bill have argued it would burden online retailers with meeting tax requirements for the country's nearly 10,000 taxing jurisdictions, and the tax lawyers who spoke Wednesday said their options would solve that concern.

One alternative — origin sourcing — would levy state sales taxes based on the retailer's location rather than the purchaser's address.

"Simply treating remote sales in the same way that we already treat brick-and-mortar sales would level the playing field in an honest way," said the R Street Institute's Andrew Moylan.

Detractors said such a proposal could set off a "race to the bottom," causing retailers to rush en masse to establish locations in the five states that don't currently collect sales tax. Others argued for keeping consumers' tax contributions local.

"If I buy something in Washington, I don't want to pay Washington," said Republican Rep. Spencer Bachus of Alabama. "I want to pay where my kids go to school."

Another proposal floated by the Simon Property Group's William Moschella would simply ban transactions that don't meet the sales-tax laws of the state to which the product is shipped.

Others touted the Streamlined Sales Tax Project, a 24-state effort to make sales taxes simpler and more uniform in order to pave the way for a nationwide online sales tax.

Consumers are technically obligated to pay a use tax on sales-tax-free online purchases, essentially giving their state government an equivalent amount. But fewer than 2 percent of online shoppers pay the tax, and some estimates peg the lost revenue to state governments at $23 billion. Many governors have expressed a desire to collect that extra cash flow, and some have pledged a reduction in other taxes if online sales tax revenues start rolling in.

Meanwhile, traditional retailers have backed the Senate bill, as has Amazon — which has an increasing footprint as it expands its warehouses into more states. EBay has led much of the opposition to legislation.

The chief issue raised by opponents is the difficulty for online retailers — especially smaller ones — in correctly assessing sales tax for buyers all over the country. Compliance issues could lead to out-of-state audits and cause expensive litigation for retailers, some members said.

Advocates said those concerns are overblown, responding that simple software could make compliance easy. But that didn't satisfy some Republicans, who said the Affordable Care Act's rocky rollout has made them leery of government-touted software fixes. "We can't compute our way out of a paper bag," said Republican Rep. Blake Farenthold of Texas.