‘Marketplace Fairness' Online Tax Waits for Congress

After years of court battles and failed bills, Congress is the only hope left for a measure intended to level the tax playing field between physical businesses and their online-only competitors.

The legislation in question is Senate Bill 743, the Marketplace Fairness Act.

In essence, it would give states authority to require online-only businesses with Web sales of $1 million or greater to collect sales tax from customers.

Some background: Back when the Internet was a tadpole, the U.S. government permitted online businesses to sell their goods without collecting a sales tax. The idea was that this would help fledgling digital businesses get off the ground amidst their more established physical brethren.

Technically, in Arkansas, buyers are supposed to pay that sales tax at the time of the purchase. But without a prompt from the retailer it rarely happens.

Almost two decades later, brick-and-mortar shops up to and including behemoths like Wal-Mart Stores Inc. of Bentonville are protesting that digital businesses now have an unfair advantage.

Although Amazon.com’s profits have been up and down, with its sales increasing from $48 billion to $61 billion between 2011 and 2012, it’s not hard to see brick-and-mortar’s problem.

Some measures have been taken to try to level the field. For example, a 1992 Supreme Court ruling, originally used for mail-order companies, said that states must require collection of sales tax if businesses had a physical presence in the state.

When states made a push to collect from online-only businesses with warehouses or in-state “advertising associates,” this prompted larger businesses — most notably Amazon — to desert those warehouses and fire associates, including some in Arkansas.

Other attempts to introduce legislation at the federal level have failed. A bill introduced in 2011 by Sen. Dick Durbin, D-Ill., for example, died because it didn’t give options to individual states.

But the Marketplace Fairness Act still has a chance — it passed the Senate in May and now must clear the House. It doesn’t rely on physical presence, so online entities couldn’t dodge the issue as they have in the past.

The bill has had bipartisan support. In Arkansas, both Republican Sen. John Boozman, and Democrat Sen. Mark Pryor are co-sponsors. Republican 2nd District Rep. Tim Griffin has shown support, and Rep. Steve Womack, the Republican congressman from the 3rd District, was the original sponsor.

“Some states with strongly conservative leaders, like Wisconsin and Ohio, have already taken steps at the state level budget process,” said Robert Coon, spokesman for the Arkansas Alliance of Main Street Fairness. “They’ve said, ‘Hey, if Congress passes this bill, we don’t want to see taxes increase. So we’re going to capture any increases in state sales taxes paid by people making online purchase and offset with [reductions in] personal income taxes.’ So if it’s revenue, they’ll use that revenue to enable tax cuts.”

The proposal has been lauded by many Arkansas business leaders and brick-and-mortar shops.

“The current rules are a de facto effort by the government to choose winners and losers, and it is tilting the table unfairly to the advantage of the Internet retailer at the very real cost to the brick-and-mortar retailer,” Randy Zook, president of the Arkansas State Chamber of Commerce, said in 2012. “We think that is something that is unwise and needs to be corrected, and time is of the essence.”

Coon also said the bill would have a monetary benefit in the state. It’s expected to collect some $24 billion in previously uncollected sales taxes among the states that levy them.

Arkansas collected $2.1 billion in sales tax for its fiscal year that ended June 30, which was an increase of $22.5 million from fiscal 2012.

Most recently, U.S. Rep. Bob Goodlatte, R-Va., chairman of the House Judiciary Committee, issued in September a list of principles that the Internet sales tax should have:

Principles for an Internet Sales Tax Law
Presented by the House Judiciary Committee, Sept. 18.

  • Tax relief: Using the Internet shouldn’t create new or discriminatory taxes not faced in the offline world.
  • Tech neutrality: All businesses should be on equal footing in terms of sales tax collection.
  • No regulation without representation: Those bearing unfair regulatory burdens should have avenues to protest them.
  • Simplicity: The law should be simple enough so compliance can be inexpensive and render small business exemption unnecessary.
  • Tax competition: Federal governments should be encouraged to compete to keep tax rates low.
  • States’ rights: States should have the ability to choose their participation in the law.
  • Privacy rights: Sensitive consumer data should be protected.

“That was a pretty big step for getting it back in the House,” Coon said. “A lot of what he’s got in there are things already in Womack’s bill. We want to work through this process and Chairman Goodlatte provided a great opportunity to get this thing rolling again.”

Obstacles

The bill isn’t in the clear, though.

“The retail industry has the Christmas and holiday season coming up, and they’d love to have some resolution by then, but it’s a marathon, not a sprint,” Coon said.

Coon said the bill has encountered some misconceptions on how it would be applied. For example, some balk at the idea that a new tax requirement would be leveled at states. But the law gives states the choice to require it — or not.

“This is a permissive, not a requirement,” Coon said.

There’s also one demographic that has, at best, some reservations about the legislation: small and medium businesses with online components, especially Web developers that design sites for retail businesses.

Brent Birch, director of Flex360, the Web design division of Arkansas Business Publishing Group, said the problem is with implementing the software for the change, which will have to be accurate across all 50 states.

“Tax tables will have to be integrated into their e-commerce platforms and be dynamic enough to be updated in real time,” he said. “How many online retailers are prepared for that? Likely not many outside of the huge outfits. And the cost to implement will likely be passed back to consumers in one way or another.”

He said the process of enforcing collection of sales tax from out-of-state customers, then remitting them back to the customer’s state, would be a “nightmare.”

“Also, what retailer is going to be excited about collecting taxes, then passing back dollars to states where they have no presence and no vote?” he said.

“It would be so hard to regulate,” said Greg Eberdt, vice president of ArkansasWeb, a Web design and hosting company in Little Rock. He said sales tax is “already difficult enough to figure out now. For small businesses, it’s going to be a nightmare.”

Eberdt said many of ArkansasWeb’s clients are smaller businesses with online segments, and they’ve expressed chagrin at the bill.

“Some have actually gone out of business just trying to compete against some of the bigger stores that are online now,” he said. “Having to pay taxes on top of that will definitely hurt them. Most of them are not equipped for totally changing their whole system and the way they’re able to calculate stuff and ship properly. It would throw them into a frenzy.”

Chris McMillen, president of Little Rock Web developer Mass Enthusiasm, said his clients have expressed similar opinions. In particular, he said it will become a problem when adapting each business to Arkansas’ many sales tax codes.

“It’s not just a simple, flat tax,” he said. “It’s down to county, street, ZIP code and by state. It makes it very difficult. There’s a lot more labor involved on our end to fulfill a project for a client when a tax situation like that is implemented as well. It prices us right out of the market for a small business.”

Eric Caldwell, CEO of Web-Jive LLC, said the $1 million cap is problematic. A business that just approaches or passes that limit might find itself underwater quickly when trying to implement the software for the tax collection.

“A million may seem like a lot, but when you’ve got warehousing, logistics, you name it, a million is not a lot of money,” he said. “One million just keeps your doors open.”

Coon said he’s aware of these types of concerns.

“There’s a revenue-based small business exemption in the bill,” he said.

He said a provision in the legislation also requires any state implementing it to offer free software to help businesses adjust.

But regardless of these opinions on the bill, it’s already made more progress than any other previously proposed idea.

“At the end of the day, it’s something more permissive, a better approach,” Coon said. “Congress has been identified by the courts as the only way to fix this issue, and it’s already gotten farther than it ever has.”

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