Tax Law Updates | New Proposed Legislation

December 2, 2011

Online Retailers Spar over Federal Internet Sales Tax Legislations

Marketplace Fairness Act/ Marketplace Equity Act of 2011
S. _____, 11/30/2011

Online Retailers Spar over Federal Internet Sales Tax Legislations

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Online retail giants eBay, Amazon.com, and Overstock.com relayed their different positions on pending legislations relating to internet sales tax during congressional hearings conducted by the House Judiciary Committee.

The Two Bills

At the heart of the controversy are two pending bills: the first is the Market Fairness Act (MFA) that was unveiled in early November by bipartisan senators led by U.S. Senators Mike Enzi (R-Wyo.), Dick Durbin (D-Ill.), and Lamar Alexander (R-Tenn.). This bill would give states the option to collect the sales taxes they are owed under current law from out-of-state businesses, rather than rely on consumers to pay those taxes to the states—the method of tax collection to which they are now restricted.

Under the current tax loophole, while brick-and-mortar retailers collect sales taxes from customers who make purchases in their stores, many online and catalog retailers do not collect the same taxes. Under the Marketplace Fairness Act, states would have the option to collect sales and use tax revenues from out-of-state sellers through a new, simplified tax system.

The legislation would streamline the country’s more than 7,500 diverse sales tax jurisdictions and provide two options by which states could begin collecting sales taxes from online and catalog purchases.

States that voluntarily become Member States of the Streamlined Sales and Use Tax Agreement (SSUTA) would be able to require remote sellers to collect and remit sales and use taxes after 90 days. A total of 24 states have permanently changed their tax laws and implemented the requirements of the agreement. The agreement would help harmonize states sales and use tax rules, bring uniformity to the definitions of items in the sales tax base, reduce the paperwork burden on retailers, and incorporate new technology to modernize administrative procedures.

States that do not wish to become members of SSUTA would be allowed to collect the taxes only if they adopt certain minimum simplification requirements and provide sellers with additional notices on the collection requirements.

The legislation exempts sellers who make less than $500,000 in total remote sales in the year preceding the sale to qualify for an exemption and not be required to collect the tax.

The second legislation is the Marketplace Equity Act (MEA), introduced by a bipartisan group of representatives led by Congressman Steve Womack (R-AR) and Congresswoman Jackie Speier (D-CA).

According to its sponsors, “MEA empowers states to require online companies that do not have a physical presence in the state to collect and remit state sales taxes. These companies currently enjoy a significant price advantage over bricks and mortar retailers who do have to collect state sales taxes. An important component is a small business exception, which exempts businesses with small amounts of online sales from being required to collect. Otherwise, the states are allowed to collect the taxes owed to them as they choose based on very basic guidelines.”

This legislation includes an important exemption for small businesses. As long as a small business does not have more than $100,000 in annual sales in an individual state per year, or $1 million in sales nationally, that small business is exempt from having to collect and remit sales tax from sales in that state. Furthermore, this amount operates as a floor, so that if a state chooses, they may set the threshold higher, but cannot set it lower.

This legislation allows the state to not only opt into requiring collection, but choose what size of business from which they will require collection. In this way small businesses will not be disproportionately impacted by the collection requirement if a State chooses to require the collection and remittance of sales and use tax.

Amazon.com’s Stand: Support for the MFA Bill

Amazon.com is a Seattle-based online retailer that started in July 1995. Amazon.com and its affiliates operate websites, including www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, www.amazon.ca, www.amazon.cn, www.amazon.it, and www.amazon.es.

Amazon.com, Inc. (NASDAQ: AMZN) confirmed its strong support for the federal bill introduced by United States Senators Enzi, Durbin, and Alexander, that would create a constitutional framework for collecting sales tax online.

“Amazon strongly supports enactment of the Enzi-Durbin-Alexander bill (MFA) and will work with Congress, retailers, and the states to get this bi-partisan legislation passed,” said Paul Misener, Amazon vice president, global public policy. “It’s a win-win resolution - and as analysts have noted, Amazon offers customers the best prices with or without sales tax.”

If enacted, the Enzi-Durbin-Alexander bill will allow states to require out of state retailers to collect sales tax at the time of purchase and remit those taxes on behalf of customers, and it will facilitate collection on behalf of third party sellers., according to Misener.

“Thus, this bill will allow states to obtain additional revenue without new taxes or federal spending and will make it easy for consumers and small retailers to comply with state sales tax laws,” he added.

eBay Inc. Takes a Different View, Bats for Protection to Small Businesses That use the eBay Platform and the Internet More Generally

In the congressional hearings, eBay Inc. was represented by Tod Cohen, Vice President and Deputy General Counsel of Global Government Relations, Intellectual Property, Regulatory and Asset Protection.

eBay Inc. was founded in 1995 and is headquartered in San Jose, California. Its business connects millions of buyers and sellers across the globe everyday through the eBay platform, which is the world’s largest online marketplace; through PayPal, which enables individuals and businesses to securely, easily and quickly send and receive online payments; and through GSI Commerce, which facilitates e-commerce, multichannel retailing and digital marketing for global enterprises.

Cohen expressed his company’s opposition to the MEA and the MFA, and instead batted for protection for small businesses that use the eBay platform and the internet more generally. His position explicitly states that:

“The Internet sales tax bills that have been introduced in this Congress would change the playing field in a way that would apply sales taxes to small business retailers in the same manner as giant retailers. This change in law would mean that consumers would face a new tax cost on goods purchased from small remote retailers, but the consumer would not gain benefits tied to presence. This means that the shopper will be less likely to buy from small retailers on the Internet. The real world effect will be to disadvantage small business retailers, a segment of retailers that is already losing market share under the status quo. This is why these bills are anti-small business.”

Current law regarding remote state sales tax authority is not perfect, and there have been problems. A few large online retailers have not operated in the spirit of the law, failing to collect sales taxes where they have physical presence. However, their smaller competitors are and do collect and remit sales taxes for purchases made both online and offline. Some states have used sales tax-related incentives to encourage local investment by said large retailers. In addition, states have not enforced their consumer Use Tax laws. These are real problems with the current system. But current remote sales tax policies for small business retailers using the Internet are a positive aspect of the current system. Protecting small business retail from blanket remote sales tax collection is beneficial for retail competition and economic growth, and should be retained in any new remote sales tax regime.

Congress has the power to address abuses and inequities without raising new costs on small business retail entrepreneurs. A real Small Business Exemption would do that. A real Small Business Exemption would protect small retailers who are already falling behind. Permanently protecting small business retailers from national remote sales tax collection burdens will promote new retail competition. Some have said that e-commerce does not need “infant industry protection.” While this debate is not about an infant industry, it is about infant and small businesses. And, the reality is that there will always be small business retailers who you want to protect and allow to grow. A true Small Business Exemption will be an incubator for new businesses, who we hope will graduate into any new collection regime.

Protecting small businesses from burdens that will undermine their growth and even directly promoting small business operations is not a new or novel concept. There has traditionally been bipartisan support for small business promotion. There is an entire federal agency aimed at promoting and protecting small businesses, as you well know. Also, small businesses in the last two decades have received preferential treatment in legislation such as the Family Medical Leave Act, the Health Care Reform bills, and the Small Business Jobs Act.

If you believe that small business retailers should not be harmed by a change in remote sales tax law, then the definition of what constitutes a small business that would be preserved from new tax collection requirements is an important one. Congress traditionally delegates authority to the Small Business Administration (SBA) to set small business size standards. The SBA’s unique position allows it take into account the intricate differences in diverse business models. Currently, SBA’s size standard for small “electronic shopping” businesses is $30 million in total annual sales. The absolute smallest business size standard in the retail space is $7 million, used for single stand-alone newsstands and kiosks.”

Rather than support federal online sales tax legislation that it says will be too burdensome to small online retailers, eBay instead:

“eBay strongly supports H.Res. 95. This bipartisan resolution opposes new tax collection requirements for small online businesses and entrepreneurs. The Resolution, which was introduced by your Judiciary colleagues Representatives Lungren and Lofgren, calls for policies to maintain the principle that small businesses with less presence should not be held to the same standard as large retail businesses with significant presence. eBay sincerely appreciates Congressman Lungren’s and Congresswoman Lofgren’s leadership on this issue. We also appreciate the 31 cosponsors that have declared their support for small business retailers by cosponsoring H.Res. 95.

To conclude, eBay’s focus has been to protect small business retailers using the Internet from any new onerous tax burdens. eBay supports robust protections for small business retailers in any new remote sales tax regime, and will continue to urge members of the Committee to do the same.”

Overstock.com’s Stand: Total Opposition

Dr. Patrick M. Byrne. the Chairman and CEO of Overstock.com, Inc., said, “. I have views on this subject because, from my experience, I believe that if the proposed collection obligations had existed in October 1999 when Overstock.com launched, we would likely not be here today. The odds against a new online business being successful are long in any case, but requiring online businesses to collect sales tax on behalf of remote state governments without remuneration, simplification and indemnity, make those odds even slimmer.”

Overstock.com is a publicly traded Utah-based Internet retailer that launched in 1999 with 18 employees and$1.8 million in sales. In 2010, Overstock had 1,500 employees, all in Utah, $1.1 billion of revenues, and $14 million of net income. It offers a wide variety of high-quality, brand-name merchandise and services at discount prices, including bedding, home decor, appliances, watches, jewelry, electronics, sporting goods, clothing, shoes, cars, vacations and insurance.

Byrne explained his position this way:

“We oppose the pending bills because they “outsource” to retailers, without compensation, the burden of collecting taxes from residents of states where those retailers have no physical presence nexus. The absence of a physical presence nexus requirement, the long-standing Constitutional standard to be met before states may impose burdens of taxation beyond their borders, makes remote sales tax collection a burden on innovation, entry, and commerce. The taxing jurisdiction should be primarily, if not exclusively, responsible for collecting sales tax from its residents. If states want or need to hire retailers to collect sales taxes from their residents, true “fairness” requires that the states provide them with: (1) plug-and-play software solutions, (2) indemnification from computation, collection, and administration errors, and (3) compensation for doing the tax collection work on behalf of those states.

It is unfair to allow states the ability to impose collection obligations on remote E-commerce retailers that have no physical nexus with the state. Imposing such an obligation on a company that has no political say in the taxing decision, the election of state and local officials who make that decision, or how the tax revenues are used, is about as perfect a definition of taxation without representation as can be devised in the 21st Century.

For a remote seller, determining what transactions are taxable and at what rate in a given jurisdiction is extremely complex. For example, we sell gift baskets. Some of the nearly 10,000 taxing jurisdictions impose sales tax on the entire basket of goods, others exempt food products from taxation, and others treat some of the products as candy subject to a higher tax. I trust you see the problem. Back-to-school sales tax holidays for clothes and supplies are another example. It is far easier for retailers with a physical presence in a jurisdiction to know the tax nuances of their jurisdiction. But it is vastly more complex for an E-commerce retailer with thousands or millions of products to know the specifics of the nearly 10,000 taxing authorities where they are not physically present. Thus, if Congress allows states to shift the sales tax collection obligation to retailers, it must require that states supply the software solution. Failure to do so exacerbates the heavy burden to entry of startups and small businesses.”

View a PDF of the proposed legislation