Congress Likely to Postpone Online Sales Tax Collection

By: - December 27, 2012 12:00 am

Federal legislation that would allow states to make online retailers collect sales taxes has bipartisan support in Congress and among state officials. It even has the support of Amazon, by far the nation’s largest online retailer, in addition to backing from traditional retailers such as Wal-Mart. What it doesn’t have, it appears, is a chance to pass this year as part of any fiscal cliff compromise.

The Hill, a publication that covers the federal government, reported earlier this week that lawmakers probably won’t vote on the Marketplace Fairness Act, as the online tax legislation is known, before the 112th Congress adjourns January 3. Supporters of the legislation have tried unsuccessfully to attach it to various bills in recent weeks. Instead, it’s more likely to come up as part of a broader tax reform debate in the new Congress next year.

That result would disappoint many state officials, who hope Washington will change a policy under which retailers are generally required to collect sales taxes only in states where they have a physical location. “The stars are finally aligning in our favor for passage,” Utah State Senator Curt Bramble, a Republican, said earlier this month, according to the Huffington Post.

Requiring sales tax collections for online purchases would provide a revenue boost for states to help them make up for the federal cutbacks that would accompany a failure to reach a fiscal cliff compromise. Consumers are already technically required to pay sales taxes on online purchases, but few do when the sellers themselves don’t collect them. While the exact amount is uncertain, it’s clear that billions of dollars a year are at stake for states.

That is why state officeholders, many long supportive of the concept, have made the Marketplace Fairness Act a top priority lately. The Bond Buyer reported that 600 state legislators pressured Congress on the issue in a single day in early December, the first time the National Conference of State Legislatures had ever dedicated a day of lobbying to one issue.

Meanwhile, Washington Governor Christine Gregoire, a Democrat, and Tennessee Governor Bill Haslam, a Republican, sent a letter to key U.S. senators earlier this month, asking them to act now rather than wait for future action on tax reform. “Never before has the need for legislation to grant states the authority to collect sales taxes on remote sales been greater,” the governors wrote. “The continued disparity between online retailers and Main Street businesses is shuttering stores and undermining state budgets.”

So far, those arguments haven’t been able to overcome congressional inertia or win over ideological opposition. Many online retailers oppose the change, as do some conservative Republicans. They argue that collecting the tax would cause administrative headaches for businesses and would have the practical effect of requiring consumers to pay more, even if the taxes already are technically owed. S.T. Karnick, director of research for the Heartland Institute, recently told McClatchy that the bill is “just another tax hike to prop up big government.”

Barring a surprise from Congress, the year will end where it began, with Amazon striking state-by-state deals to collect the tax while awaiting federal action. The retailer’s latest agreement came in December with Massachusetts, where it will start collecting sales taxes November 1, 2013.

Even in hailing that deal, though, Paul Misener, Amazon’s vice president of global public policy, expressed his dissatisfaction at the lack of congressional action. “Federal legislation is the only way to level the playing field for all sellers,” Misener said in a statement, “the only way for states to obtain more than a fraction of the sales tax revenue that is already owed, and the only way to fully protect states’ rights.”

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Josh Goodman

Josh Goodman helps lead research on fiscal management and place-based economic development programs as part of Pew’s state fiscal health project. Goodman has served as a primary author for Pew studies that examine how states should evaluate tax incentives and maintain budget discipline when implementing those incentives.