WASHINGTON — The Internet sales tax loophole could soon be closed.
This story first appeared in the April 24, 2013 issue of WWD. Subscribe Today.
With broad bipartisan support and two preliminary votes showing a strong majority, the Senate seems poised to pass a bill as early as this week that would allow states to collect sales taxes from out-of-state online sellers, a top priority for brick-and-mortar retailers who have led the fight to level the playing field for over a decade.
The Senate began debate on the legislation, dubbed the Marketplace Fairness Act, this week after easily clearing a procedural hurdle on Monday night, setting the stage for a possible vote by week’s end. The White House supports the legislation but if it clears the Senate, it will also have to be approved by the House, where its prospects appear less certain.
Sen. Dick Durbin (D., Ill.), a cosponsor of the bill, said during floor debate this week that mom-and-pop businesses are losing sales to online sellers because of the sales tax disparity.
Durbin said “showrooming” has become a problem and pointed to an example of a local businessman in Normal, Ill., who owns a bicycle and running gear store and sees customers come in, try on running shoes in different colors, leave the store and buy them online from another seller.
“Why would somebody try the shoes on [in a store] and not buy them, but go to the Internet [and buy them]?” Durbin asked. “In many instances, it is because many Internet retailers do not collect sales tax. So in my state that means that it costs 9 to 10 percent less to buy it over the Internet. That is the reality for most companies. Here you have businesses all around America on Main Street and in shopping malls that collect sales tax on the things that they sell, competing with Internet retailers who do not collect sales taxes. Secondly, you have individuals with the obligation to pay sales tax and most of them do not. The bill…is going to try resolve this problem.”
David French, senior vice president for government relations at the National Retail Federation, which represents many department stores and specialty chains, said, “The road map here is we’re going to pass this bill. The bill finally gets us someplace close to a level playing field. Retailers want to compete as retailers, not with one hand tied behind their backs where online competition gets special treatment and preferential benefits.”
Bill Hughes, senior vice president for government relations at the Retail Industry Leaders Association, with members such as Wal-Mart Stores Inc. and Target Corp., said, “A lot of our members are willing to match the Internet prices when a showroomer is in the store. However, we [must] collect the sale tax. That would be illegal for us. Therefore we lose the sale because of the sales tax, not because we can’t match the price or the service.”
The legislation would eliminate the sales tax differential and put brick-and-mortar retailers back on the same footing, he said.
Stephen I. Sadove, chairman and chief executive officer of Saks Inc., said, “We have been very strong supporters of the bill. It’s not a question of incremental tax, it’s a question of who collects the tax. It’s not really fair that an Internet company doesn’t charge the tax and a mom-and-pop shop or a big store like Saks has to collect the tax.”
Sadove said there’s broad-based industry support for the bill, and bipartisan support because it’s not a new tax, and that, as an omnichannel retailer, Saks has been collecting taxes on its Internet sales.
“As an omnichannel retailer, I don’t look at our business as necessarily being weighted toward one channel versus the other but we are doing so much business online. I see our future very penetrated online. So the growth in market share of online transactions makes this tax unavoidable,” said William L. McComb, ceo at Fifth & Pacific Cos. Inc.
McComb said the Marketplace Fairness Act is “inevitable. It goes against Mother Nature to fight it. It’s natural and not unexpected, and we support it. It’s the reality of commerce and it’s the reality of the taxation environment that these transactions are subject to taxes the same way as they are in the stores.”
“I am supportive of the Marketplace Fairness Act,” said Ken Hicks, chairman and ceo of Foot Locker Inc. “I went to Congress and lobbied and told them, you should put this in place, to protect the poor consumer that doesn’t know they are violating the law,” by not paying taxes on their Internet purchases. “Everybody needs to be clear with customers, that they’re subject to penalties by not paying tax.” Hicks suggested that some companies have led consumers to believe they don’t have to.
“We’ll keep an eye on how things unfold, but it’s up to policy makers to decide how all this plays out,” said Nordstrom Inc.’s corporate spokesman Colin Johnson. “We don’t feel it’s our place to take a position on political matters and, whatever the outcome, it doesn’t change the fact that we need to stay focused on providing the best customer experience we can in order to earn their business.”
A bipartisan, bicameral group of lawmakers introduced legislation in February aimed at giving states the authority and option to collect sales taxes from out-of-state businesses in the 45 states that collect sales taxes, rather than rely on consumers to pay those taxes to the states. The legislation provides for a small-seller exemption that prohibits states from requiring remote sellers with less than $1 million in annual nationwide remote sales to collect sales and use taxes. State governments would also be required to provide free software to online sellers to help calculate sales taxes and lessen the burden.
The legislation is also being argued as a tax revenue issue for state governments. According to a 2012 University of Tennessee study, states are estimated to lose about $23 billion in uncollected sales taxes on sales from out-of-state online sellers.
While momentum appears to be on the side of the bill’s proponents, eBay Inc. has launched an aggressive lobbying campaign against the legislation that could complicate its path to final passage in the Senate and in the House. In addition, Sen. Max Baucus (D., Mont.), chairman of the Senate Finance Committee, has also come out against the bill, saying it would impose additional burdens and compliance demands on businesses and require companies to track thousands of different tax codes in 7,500 different jurisdictions if they do online business out-of-state.
EBay, which is reaching out to millions of its users urging opposition to the legislation, argues that the bill would impose an unfair tax burden on small businesses that use its online platform and is lobbying for an exemption on sales tax collection for online businesses with less than 50 employees or less than $10 million annually in out-of-state sales.
Tod Cohen, general counsel and vice president of government relations at eBay, said, “The current Internet sales tax bill would impose unfair taxes and burdens on small businesses that use the Internet, treating them the same as large national retailers who have the resources and capabilities to collect sales taxes nationwide. EBay believes that there is a fair and simple solution: Small businesses with less than 50 employees or less than $10 million in annual out-of-state sales should be exempt. We are asking the eBay community to join us in calling on Congress to protect small businesses.”
Amazon.com Inc. supports the legislation along with a broad swath of the retail community, which has put eBay in the position of fighting the battle with little help.
“Our view is that if you are selling $1 million online, you are a big business and you are bigger than many mom-and-pop, brick-and-mortar retailers who have to collect sales taxes,” said RILA’s Hughes. “EBay is simply trying to protect a very small number of large sellers who use their platform to gain an unfair competitive advantage of avoiding collecting these already-due sales taxes.”