House panel weighs costs of online sales tax

The House Judiciary Republicans are weighing the costs of a system that would allow states to collect sales tax on online purchases. 

At a hearing on Wednesday, Republicans searched for an online sales tax system that would not create unfair burdens for Internet businesses and worried about any bill that could be considered a new tax.

Democrats, on the other hand, pushed for the committee to take up legislation quickly and pointed to a Senate bill that overwhelmingly passed that chamber last year.

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Most agreed that something needs to be changed to level the playing field between online and brick-and-mortar stores.

Currently, a state can only collect sales tax from online purchases made by residents from in-state retailers. The Senate’s Marketplace Fairness Act sought to remove this disparity between online and brick-and-mortar retailers by allowing states to collect sales tax on residents’ online purchases from out-of-state retailers.

The bill’s proponents — including House Judiciary Democrats — say this would level the playing field for “brick” retailers and “click” retailers.

Rep. Ted Deutch (D-Fla.) asked committee members to consider the current system’s burdens in addition to any burdens imposed on online retailers under a new online sales tax regime.

“Shouldn’t we also be thinking about the burden that we’re imposing currently on business owners … by allowing a system to continue where independent retailers, retailers who play crucial roles in our communities, find themselves at a disadvantage,” he said.

On the other hand, the bill’s critics say it would impose undue compliance burdens on online retailers who would suddenly have to navigate almost 10,000 state and local tax jurisdictions.

“This is a new tax to those from whom it’s never been collected,” Rep. Tom Marino (R-Pa.) said. “I’m one to not support an increase in taxes.”

While House Judiciary Chairman Bob GoodlatteBob GoodlatteHow the White House got rolled on the Saudi-9/11 bill Overnight Defense: Congress overrides Obama 9/11 veto | Pentagon breathes easy after funding deal | More troops heading to Iraq Congress votes to override Obama for first time MORE (R-Va.) has said he would examine the issue, he has not taken up the Senate bill wholesale. Instead, he released a set of seven principles last year that any legislation against his committee must meet.

During Wednesday’s hearing, Goodlatte pushed a panel of tax lawyers to consider how their alternative online sales tax proposals match up with his principles.

Goodlatte said that the Marketplace Fairness Act does not measure up to his principle about minimizing compliance burdens. “The bill required states to provide free software” to calculate interstate sales tax, “but did not address integration costs,” he said.

He questioned the efficacy of software solutions in light of the recent website issues faced by President Obama’s healthcare system under the Affordable Care Act.

“There are over 9,600 taxing jurisdictions, and the Affordable Care Act experience has left voters wary of highly touted software solutions,” he said.

Former-Rep. Christopher Cox (R-Calif.) — who testified on behalf of e-commerce trade group NetChoice — said tax calculation software such as the kind provided under the Senate bill “is free like a puppy” because it does not take into account integration costs.

Goodlatte also pressed panelists to consider whether their alternative tax solutions would raise privacy concerns by requiring multiple tax agencies to process individual consumers’ purchase information.

Cox said his proposal — which would require state tax agencies to collect and remit sales tax to other states for their residents’ purchases — met Goodlatte’s privacy criteria by allowing an online retailer to answer to only his states’ tax authority.

Cox said the privacy concerns are especially poignant in light of recent high-profile data breaches, including Target’s, which made vulnerable the personal and financial information of tens of millions of consumers.

Rep. Jerrold Nadler (D-N.Y.) said he disagreed with one of Goodlatte’s principles and urged the committee to take up the Marketplace Fairness Act.

Nadler acknowledged the desire the even the playing field between online and brick-and-mortar retailers but said the debate is “also about a far more broader principle; it’s about not destroying the sovereignty of the states.”

“You might want to keep tax rates low, or high, or middling,” he said, citing one of Goodlatte’s principles that encourages competition on tax policy to keep taxes low.

“It’s a decision for the states” to make, Nadler said, adding that the committee’s job as federal regulators is “to protect their ability to decide if tax rates are low or high.”

While some Republicans took up Nadler’s argument and pushed for an online sales tax as a states’ rights issue, many on the committee questioned whether a federal system to empower states to collect online sales tax would constitute a new tax. 

Rep. Steve Chabot (R-Ohio) said he doubts the arguments made by cash-strapped states that a federal law empowering them to collect an online sales tax would allow them to lower other taxes.

“I find it not credible that states are going to lower taxes,” he said.

Chabot also asked panelists to clarify how often online retailers avoid collecting sales tax.

“A lot more Internet sales tax is collected than people generally say,” he said, pointing to large online retailers such as Amazon, which have physical presences in many states.

Democrats on the committee pushed for quick consideration of an online sales tax system, stressing a need to level the playing field between online and physical retailers.

Judiciary ranking member John Conyers (D-Mich.) said he was open to the alternative systems proposed at the hearing but urged his committee to take quick action.

This issue is a prime opportunity for all of us to work in a bipartisan basis on legislation,” he said. “But, it is imperative that we do so this year.”

Rep. Zoe Lofgren (D-Calif.) expressed a desire to create parity between online and brick-and-mortar but wondered about the compliance burdens on small businesses under any of the online sales tax systems outlined by panelists.

“This is not a simple issue,” she said. “If it were, it would have been solved a long time ago.”