A controversial proposal to rewrite federal tax law to include ecommerce transactions has resurfaced in Congress, sparking protests from online retailers and advocacy groups, and revisiting a long-simmering debate over how sales taxes should be collected on Internet purchases.
Rep. Bill Delahunt (D-Mass.) has teamed with four Democratic co-sponsors to introduce the Main Street Fairness Act, legislation that aims to put online retailers on a par with their brick-and-mortar counterparts regarding the collection of sales taxes.
Internet retailers typically only collect sales taxes in states where they have a physical presence, such as a corporate office, call center or distribution center, though some states have enacted laws to impose collection requirements on ecommerce companies that generate sales through referrals from affiliates.
Delahunt's bill would authorize states that participate in a voluntary consortium that aims to harmonize the byzantine web of state and local tax rules across the country to require online retailers to collect and remit taxes on residents' purchases.
The complexity of the tax code has been a central argument of opponents of the online collection requirement. Vocal advocates such as eBay (NASDAQ: EBAY) have argued that even the provisions of the Streamline Sales and Use Tax Agreement endorsed by Delahunt's bill don't do enough to simplify the thicket of tax codes in place in more than 8,000 distinct tax jurisdictions across the country.
The company was quick to criticize the new legislation.
"Year after year supporters of increased Internet sales taxes recommend legislation that would impose significant new costs on hundreds of thousands of online small businesses and ecommerce entrepreneurs, which is sure to harm the economy and kill small business jobs," eBay Deputy General Counsel Tod Cohen said in a statement.
"At a time when unemployment rates are high and small businesses across the country are closing shop, we are confident that Congress will protect small Internet retailers and the consumers they serve from another Internet tax scheme."
Very often in the debate over such proposals critics describe the sales-tax requirement as the creation of a new tax. As a talking point, describing the end of tax-free shopping has long served to inspire popular opposition to legislation such as Delahunt's bill, even if it stretches the truth a bit.
For many Americans, shopping online is in fact a tax-free exercise because Internet retailers generally aren't required to collect sales taxes on purchases made by residents of states where they don't have operations. But shoppers are still obligated to remit the payments on those transactions to the state in what is known as a use tax, though many people don't know about that requirement, and of those who do, a large number simply ignore it.
As a result, some estimates project state governments to lose out on as much as $23 billion by 2012. The National Conference of State Legislatures praised Delahunt for authoring legislation that could help states overcome "historic budget gaps."
The bill also won plaudits from the National Retail Federation and the Retail Industry Leaders Association, industry trade groups that argue that online retailers enjoy an unfair competitive advantage under current tax law over the brick-and-mortar outfits they represent.
The U.S. Supreme Court last revisited the issue in 1992, when it ruled that state governments could not require companies to collect taxes on remote purchases made by residents in states where they do not have a physical presence. In that ruling, however, the court noted that Congress has the authority to enact legislation such as Delahunt's bill that would authorize states to begin compelling retailers to collect the taxes.
Proposals for a federal law on ecommerce sales taxes have been kicking around Congress for more than a decade. In the meantime, some states have enacted laws requiring ecommerce companies to collect sales taxes even if they don't have any operations there, claiming that the networks of in-state affiliates who drive traffic to online stores such as Amazon (NASDAQ: AMZN) and Overstock.com (NASDAQ: OSTK) are sufficient to constitute the physical presence requirement the Supreme Court established.
Amazon's challenge against New York, the first state to enact such a law, is currently working its way through the courts.
Kenneth Corbin is an associate editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.
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