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A Senate hearing was held on Wednesday to discuss whether or not consumers will have to shell out taxes on more of their online purchases.
Specifically, The U.S. Senate Committee on Commerce, Science, and Transportation examined the current policy that exempts many online retailers from having to collect sales tax. The present policy is based on the 1992 Supreme Court decision, Quill Corp. v. North Dakota, which found that businesses without a physical presence in a state are not required to collect state sales tax.
In its decision, the Supreme Court argued that keeping track of each individual state’s tax rate would be an arduous and complex task for online retailers. But supporters of the bill are persuaded that it would simplify and streamline the tax system, making it easier for online vendors to comply with each state’s tax rules.
Not unexpectedly, the National Retail Federation, a trade association for physical retailers, supports the bill. “Brick-and-mortar retailers are major contributors to the health of local communities and should not be placed at a disadvantage compared to remote [and online] sellers that have no local presence,” says NRF Senior Vice President David French. “This disadvantage is not created by the marketplace, but rather it is imposed by the current state of the law following the Quill decision, stifling retailers across the country.”
Brian Bieron, eBay’s senior director of federal government relations, countered that statement by saying: “It’s small businesses who would face the biggest new burden if you change this law the way that’s being proposed.”
Sen. Jim DeMint (R-SC) commented on the proposal in a Wall Street Journal op-ed:
The Marketplace Fairness Act recently introduced in the Senate would require online retailers to collect and pay sales taxes to states where they have no physical presence or democratic recourse. Overstock.com, eBay and the like could have to pay sales taxes to any state from which an Internet user placed an order, even if the company’s headquarters, warehouses and sales staff are located entirely in other states.
The Supreme Court ruled (in Quill Corp. v. North Dakota, 1992) that retailers can be required to collect sales taxes only in states where they have a physical presence. The proposal before Congress, however, would give a federal blessing for states to chase revenues far outside their borders.
Consider the absurdity of such a law. When a customer buys a product in a store, does the cashier ask for the customer’s home address? Of course not. The store simply charges the state and local sales taxes applicable for its physical location, no questions asked.”
The proposed legislation would differentiate between how online and brick and mortar businesses handle the sales tax. Websites would be forced to add taxes to a sale based on the shipping destination of the product, which may be a state in which neither the seller nor the buyer resides. That standard has never been imposed on mom-and-pop store owners.
DeMint charges that politicians want the bill passed in order to raise new tax revenue for broken state governments who are facing budget shortfalls. He went on to maintain that legislators in state capitals don’t want to make the hard decisions to cut spending or raise taxes on their constituents because they fear the voter backlash. So, according to DeMint, they’d rather have Washington do the dirty work, thus making it legal for them to tax people who can’t vote against them.
It is a nationally mandated Internet sales tax on businesses. Once a single state demands these sales tax collections under the new law, businesses in every other state would be forced to comply with that state’s tax laws. Dozens of states are eagerly waiting to raise those taxes, as soon as Washington opens the floodgates.
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The proposal, if passed, represents yet another government imposed burden on Internet entrepreneurs. There are already nearly 10,000 state, local and municipal tax jurisdictions to navigate nationwide.
Complying with just one state’s tax laws costs small businesses disproportionately more than larger firms who can afford accounting and technology teams to help them work through these laws. A 2006 PricewaterhouseCoopers study found that tax-compliance costs for small businesses (those having $1 million to $10 million in annual sales) are nearly 2.5 times greater than those of larger firms. For businesses under $1 million in sales, those costs explode to 16 cents on every dollar of revenue.
DeMint elaborates: “And woe to online sellers if they have a dispute with one of the many states that will be unleashed to tax them. A small business owner in South Carolina could face simultaneous audits from California, New Jersey and Hawaii, with no political recourse.”
Maryland Gov. Martin O’Malley didn’t waste any time in calling for a 6% tax on all downloads—music, movies, e-books and more—from vendors such as iTunes and Amazon.
So, once again we have proposed legislation that would discourage entrepreneurship and strangle existing businesses. Another tax disaster and road block to the growth of the already struggling private sector.
Photo Credit: onlinebusiness.volusion.com