The Direct Marketing Association is cautioning legislators about a bill introduced late last month that would allow states to force online sellers to collect sales taxes for all state and local taxing jurisdictions.
The bill, S. 34, introduced by Sen. Michael Enzi (R-WY), would mandate provisions of the Streamlined Sales and Use Tax Agreement, a voluntary agreement that 21 states are currently participating in. The bill’s co-sponsors are Sens. Dianne Feinstein (D-CA) and George Voinovich (R-OH).
“Unfortunately, the ‘The Sales Tax Fairness and Simplification Act’ is neither fair nor simple,” said Steven K. Berry, executive vice president of government and consumer affairs for the DMA. “A truly workable simplification plan would standardize definitions of taxable goods across state borders and offer a single tax rate per state for all types and channels of commerce.”
SSTA claims to streamline the country’s more than 7,600 diverse sales tax jurisdictions by permitting states that become voluntary members of the Streamlined Sales and Use Tax Agreement to require remote sellers to collect and remit sales and use taxes.
But the DMA said it in fact would only add a new layer of complexity, expense and burden for businesses around the country. Sen. Enzi unsuccessfully pushed a similar bill in 2005.
In decisions in 1967 and again in 1992, the Supreme Court ruled that in order to be able to tax sales originating outside their boundaries, states must remove the burden placed on retailers by the complexity of having to comply with the requirements of thousands of different taxing jurisdictions.
Currently, only businesses with a physical presence or “nexus” within a state are required to collect taxes for the jurisdictions within that state.
“The failure of S.34 to address the need for a reduction in the number of tax jurisdictions remains a critical obstacle to a viable streamlined sales tax program,” Mr. Berry said.
But Sen. Enzi said his bill would encourage tax simplification by requiring states to implement and maintain measures before they can require any remote seller to collect and remit sales and use taxes.
“Simply put, if Congress continues to allow remote sales taxes to go uncollected and electronic commerce continues to grow as predicted, other taxes, such as income or property taxes, will have to be increased to offset the lost revenue to state and local governments,” Sen. Enzi said in a statement. “I want to avoid that.”
Mr. Berry pointed out that many companies would not have sufficient resources to collect and remit sales taxes for each of the thousands of jurisdictions, much less to bear the cost of a possible audit at any time by 46 different state revenue departments (45 states plus the District of Columbia impose sales tax).
The DMA also cautioned that the bill does not lay out strong enough requirements for creating consistent definitions of taxable goods.
For example, in some jurisdictions tennis shoes are considered nontaxable clothing and in others taxed as “athletic gear.”
Sen. Enzi’s bill includes a provision that would allow remote sellers who make less than $5 million nationwide in the year preceding the sale to qualify for an exemption and not be required to collect the tax.
The bill also has a provision that would allow tribal governments to also participate in the streamlined sales tax system. Tribes would have to meet the same standards and requirements as a state and would also be allowed a seat on the governing board.
The bill has been referred to the Senate Finance Committee.
Meanwhile, another Internet tax issue is heating up in Congress this year.
The Internet Tax Moratorium – which set a moratorium on charging taxes for DSL, cable and other Internet access for consumers – ends on Nov. 1. So this tax issue will have to be resolved by the end of the year. The moratorium has been extended several times since it was first approved in 1998. The last extension was adopted in 2003.
On May 23, Sens. Tom Carper (D-DE) and Lamar Alexander (R-TN) introduced the Internet Tax Freedom Extension Act of 2007 that would extend the current moratorium for another four years.
The Carper-Alexander legislation essentially changes the existing moratorium by closing tax loopholes and clarifying the definition of “Internet access” to better protect essential goods and services provided by state and local governments.
The Carper-Alexander bill alters the definition of tax-free Internet access to ensure that a consumer’s connection to the Internet, including e-mail and instant messaging, remains tax-free.
At the same time, the bill closes a loophole in the original 1998 moratorium that could allow an Internet service provider to bundle Internet access with other services and make them all tax-free.
This loophole is important because it could harm the traditional tax base of state and local governments. In 2004, the last time the ban was extended, Congress exempted voice over Internet protocol services from the moratorium because of fears that states and localities could lose billions of dollars in revenue as telephone services migrated to the Internet.
In addition, the legislation extends the original “grandfather” clause, thereby allowing the nine states that collected revenue from Internet access before the 1998 tax moratorium to continue to collect those taxes.