By Jamey Dunn
Illinois retailers are renewing a push for a federal law that would require online vendors to collect taxes on their sales.
Illinois lawmakers passed a law earlier this year that requires online sellers to collect state taxes if they work with marketers located in the state. Amazon.com and Overstock.com severed ties with marketers Illinois, which led to a few of such businesses to leave the state. The U.S. Supreme Court ruled that states cannot require businesses to collect the tax unless they have a physical presence in the state.
While the Illinois law may have chased off some businesses, proponents say it helped to draw national attention to the issue. Illinois' law has begun to bring in some tax dollars. According to the Department of Revenue, dozens of Internet retailers have registered with the state. Sue Hofer, a spokesperson for the department, said it does not yet have figures on how much is being collected under the law. “We are making process. It’s not everyone, and it certainly isn’t several of the much larger ones," Hofer said.
Until recently, Amazon and other large online retailers either cut ties in states that tried require them to collect taxes or fought the issue in court. Amazon lost its legal battle in New York and currently collects taxes there. However, the company worked out a deal with California lawmakers that has led to Amazon actively lobbying for a law to address the issue nationally. If a national solution does not pass, Amazon has agreed to collect taxes in California next year.
U.S. Sen. Richard Durbin has backed a national solution for years, but retailers, both online and brick and mortar, say a new version of the Illinois Democrat's plan has a real shot at approval in Congress.
Bricks-and-mortar retailers maintain that not collecting the taxes gives online sellers an advantage because they can offer what seems to be a lower price. Illinois residents who buy goods from non-collecting Internet retailers still owe the tax and are required to declare their purchases on their income tax returns. This was the first year that the Illinois Department of Revenue included a line on tax returns specifically for online purchases. According to the department, residents declared their purchases on about 270,000 returns, bringing in an estimated $11 million in revenue for the state. Those advocating for Durbin’s plan say that is a fraction of the revenue that could come in if online retailers were required by Congress to collect the tax.
David Vite, president of the Retail Merchants Association, says expecting customers to keep track of their online purchases — as well as differentiate between a seller such as Target that does collect the sales tax because it has stores in the state and one such as Amazon that doesn’t — isn’t realistic, and the consequences for getting it wrong are too dire. “They are confronted with possible perjury charges. They are filing a false income tax return. That’s not fair to the customer. That’s not fair to the citizens,” he said.
The U.S. Supreme Court ruling that bars states from making out-of-state retailers collect taxes focused on mail order purchases and did not address online sales because it was made 1992, long before e-commerce was a consideration. The court did open the door in its opinions for Congress to revisit the topic. “The underlying issue is not only one that Congress may be better qualified to resolve but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions. … Accordingly, Congress is now free to decide whether, when, and to what extent the states may burden interstate mail order concerns with a duty to collect use taxes.”
A new plan, called the Marketplace Fairness Act in the U.S. Senate and the Marketplace Equity Act in the U.S. House, would allow states to require tax collection if they take steps to streamline taxes and make the process simpler for retailers, which would likely be collecting taxes across multiple states. Previous versions would have required states to sign onto a universal Streamlined Sales Tax Agreement.
Under the new proposal, states could sign onto the agreement or take less sweeping steps to simplify tax collection, such as agreeing to a universal classification of items for taxing purposes. Currently, a snack cake may be classified for taxing purposes as food in one state and candy in another, or a scarf might be clothing in one state and an accessory in another. These different classifications might also be taxed at different rates. The goal is to build a classification system that applies nationwide. “The Market Place Equity Act would be easier to comply with for the state of Illinois,” Vite said.
The act is currently held up in Congress over concerns about what size businesses it should apply to. Lawmakers are considering an exemption for small business. Talks on the exemption size range from businesses bringing in $500,000 each year to up to $1 million. Some retailers, such as eBay, say that a small business exemption in the law should be larger, potentially up to $30 million.
“The idea that small business retailers on the Internet are a threat to the survival of small business storefronts is ridiculous. The threat to small independent retailers is coming from giant multibillion-dollar competitors online and offline, which has been the case for nearly half a century,” Tod Cohen, vice president and deputy general counsel of government relations for eBay, told a U.S. House committee this week according to a written transcript. “You hear a lot about fairness in this debate. Some have claimed that a 'level playing field' means all retailers using the Internet should be held to the same remote sales tax standard. However, sameness is not fairness. Small businesses retailers face many competitive disadvantages when compared to larger retailers. They have proportionally higher costs of doing business, including providing employee benefits. And one must especially consider the costs of shipping when considering the playing field for small e-commerce businesses. Shipping prices, as with other costs, are directly related to sales volumes and how close the retailers [are] to the customer.”
But Amazon and others oppose such a large exemption. “Fairness among sellers should be created and maintained. Sellers should compete on a level playing field. Congress should not exempt too many sellers from collection, for these sellers will obtain a lasting unlevel playing field versus Main Street and other retailers. Congress should rectify the current imbalance and avoid a future imbalance,” Paul Misener, vice president for global public policy for Amazon.com, told the House committee this week, according to the written transcript. “With today’s computing and communications technology, widespread collection no longer would be an unconstitutional burden on interstate commerce, and Congress feasibly can authorize the states to require all but the very smallest volume sellers to collect.”
Vite said he doubts the commitment of retailers who want a high threshold for exemption. “I’m not sure they’re serious about getting anything done yet. Amazon is.” Vite and others are hopeful that a solution can be reached soon, whether it is the new plan, which has bipartisan support, or a version of Durbin’s previous proposals. “Whichever one passes, we’re happy with,” he said. “The Marketplace Equity Act is probably the [plan] that has the most likelihood of passing.”
For more on the effort to collect sales tax on online purchases, see Illinois Issues April 2011