Newsletter

July 7, 2010 - Bill Introduced to Close Loophole on Internet Sales Tax Collection

An updated version of federal legislation that would make it easier for states to require Internet retailers and other out-of-state merchants to collect sales tax the same as local bricks-and-mortar stores has been introduced in the House.

Representative Bill Delahunt, D-Mass., introduced H.R. 5660, the Main Street Fairness Act, on July 1. The measure was assigned to the House Judiciary Committee, where Chairman John Conyers, D-Mich., is a cosponsor. Delahunt is expected to push for action on the measure later this month.

“This bill would close a loophole that has allowed online merchants to enjoy an unfair price advantage over local stores for far too many years,” NRF Vice President and Government and Industry Relations Counsel Maureen Riehl said. “We believe in a level playing field where everyone plays by the same tax rules regardless of whether you sell merchandise in a Main Street store, through a catalog or over the Internet.”

“Sales tax collection goes far beyond the issue of competition within the retail sector,” Riehl said. “Local communities rely on sales tax revenue to provide essential services such as police and fire departments, ambulances and schools. In today’s economy more than ever, the vacuum that has been left by the increasing volume of untaxed online sales is causing a real hardship for state and local governments. If sales taxes aren’t collected, other taxes are going to be increased to make up the difference.”

Under 1992’s Quill v. North Dakota, the U.S. Supreme Court ruled that retailers are required to collect sales tax from out-of-state customers only if they have a physical presence such as a store, warehouse or office in the customer’s state. The court held that the 45 state and 7,600 local sales tax systems across the nation were too complicated for a retailer to otherwise know how much tax to collect.

The Delahunt bill would allow states that have adopted the Streamlined Sales and Use Tax Agreement to require out-of-state sellers to collect sales tax whether they have a physical presence or not. The agreement was developed to simplify sales tax laws in response to the Supreme Court ruling and has been adopted by 24 states since 2005. The pact establishes uniform definitions of taxable items, sets up mechanisms to facilitate collection and distribution of sales tax across state lines, and provides retailers with software and free databases to tell them how much tax to charge.

The bill would cover all “remote sellers,” which include online retailers, catalog merchants and “1-800” offers on radio and television. The Streamlined Sales Tax Governing Board, which overseas the simplification agreement, would be allowed to determine levels at which all retailers – both online and traditional – would be reimbursed for the costs of collecting sales tax.

Delahunt introduced the legislation in previous sessions of Congress as the Sales Tax Fairness and Simplification Act, but the new version includes a variety of updates. Among other changes, the Governing Board would determine an exemption level for small retailers. Previous versions set the exemption at $5 million in annual out-of-state sales.

The measure goes significantly further than the “Amazon Tax” enacted in New York, Rhode Island and North Carolina. The Amazon Tax requires Internet retailers with online “affiliates” in the those states – third-party web sites linking to products sold by online retailers in return for a commission – to collect sales tax on purchases made by state residents even if the retailer has no physical presence there. Backers claim locally based affiliates constitute the physical presence required by the Supreme Court’s Quill decision. NRF is concerned that the Amazon Tax fails to take the comprehensive approach of the Main Street Fairness Act and could distract from efforts to pass the federal measure.

NRF believes another state effort – a Colorado law requiring out-of-state retailers to report sales to Colorado customers to the state Department of Revenue – is constitutionally questionable because it tries to exert authority outside the state’s borders without congressional authority.

© 2010 National Retail Federation