Kenley to Congress: Online retailers need to collect sales taxes

By Lesley Weidenbener
The Statehouse File

INDIANAPOLIS – A key Indiana official told a Congressional committee Wednesday that online retailers should be required to pay sales taxes on web-based purchases to help state budgets and reduce their advantages over so-called brick-and-mortar stores.

Sen. Luke Kenley, a Noblesville Republican who chairs the state Senate Appropriations Committee, said that big and small businesses alike should collect taxes, whether the purchases takes place on Main Street or online.

But members of the U.S. House Judiciary Committee on Wednesday had questions about the practicality of forcing businesses to collect the tax, the impact that might have on prices, and whether small online firms should be exempted. Still, some lawmakers acknowledged that online sales are growing so quickly that they may need to act.

“I don’t think Congress should be in the business of picking winners and losers and inaction by Congress today results in a system with winners and losers,” said U.S. Rep. Mike Pence, an Indiana Republican and member of the Judiciary Committee.

Kenley traveled to Washington D.C. to speak to the Judiciary Committee not only as a fiscal leader in Indiana but also as chairman of the Streamlined Sales Tax Governing Board, which is national effort to simplify state and local state laws so that the sale tax can be more easily collected online.

He said the streamlined tax effort makes it cheap, efficient and easy for online retailers to collect the tax, just as brick-and-mortar stores already do.

Local stores are “acting as the display case for consumers who come in, try out the product, and solicit information…then go home and buy it online,” Kenley told federal lawmakers. Some customers even use mobile phone technology to scan product codes, check prices and buy online before leaving local stores, he said.

Currently, the state’s brick-and-mortar stores – such as a local flower shop or department store – are required to collect state sales taxes on purchases. But a two-decades old U.S. Supreme Court decision frees online retailers from the responsibility, as long as they have no stores or other facilities in the state.

Customers are required to claim their purchases on their income tax returns and pay the tax then. But in Indiana, fewer than 1 percent of Hoosiers do so. As a result the state is annually losing $77 million to $300 million in taxes on online sales, numbers that fluctuate depending on the methods used to create the estimates.

Dan Marshall, owner of Marshall Music Co. in Lansing, Mich., told lawmakers that’s not fair to the states or businesses who collect the taxes.

“We have adjusted to the economic realities that a fiercely competitive environment presents and we’re perfectly comfortable with that,” Marshall said. “What we see as an unlevel playing field … is having customers every day, every hour that we operate, coming in and price shopping and comparing our price with internet retailers who do not collect the internet sales taxes.”

But the founder of Overstock.com – a discount online retailer – told the House Judiciary Committee that changing the rules will stifle the innovation that has led to the boom in online commerce. Patrick Byrne, who remains Overstock’s chairman, said his company opposes any effort to force online retailers to collect the taxes.

“The question the committee must consider is whether this innovation will continue if Congress alters current law by allowing state to burden interstate commerce,” Byrne testified. “In my opinion, the pending bills allow states to shirk their responsibilities to collect taxes that they impose on consumers.”

Byrne said if Congress insists on passing online sales tax legislation, it should require states to make the software available to companies to do it, free the companies of liability for mistakes, and reimburse the online firms for their collections.

Tod Cohen, a regulatory attorney for eBay, which provides an online marketplace for buyers and sellers, testified that small companies should be exempted from collecting the tax – and advocated for a fairly liberal definition of “small.” He said companies with $31 million or less in sales should be exempted from collecting online sales taxes.

“There will always be small biz retailers you want to protect,” Cohen told the committee. “It is where tomorrow’s big retailers come from.”

But some lawmakers advocated a much tighter definition for a small business, including one that would exempt only those companies with sales of $150,000 or less.

Three bills have been introduced in Congress that address the issue and all define a small business differently.

Paul Misener, vice president of world-wide public policy for the online giant Amazon, pledged that his company would provide sales tax collection services to the small businesses that sell through its network. He said eBay and other online firms should do the same.

Software companies will fill in the gaps for independent, small companies, he said.

Amazon has battled states that try to force it to collect sales taxes. It has used subsidiaries to build distribution centers to avoid paying taxes in some states and canceled advertising and commission contracts with web publishers in states that are trying to use those relationships to force the tax collection.

But Misener said Amazon – originally an online bookstore that now sells nearly anything – told the Judiciary Committee that his company can support a federal law that makes that sales tax collection easier – as long as it all companies are treated equally.

He urged lawmakers not to create a small business exemption that is so large the tax collection efforts are counterproductive.

“Nearly 30 percent of uncollected sales taxes are attributable to companies with online sales below $150,000,” Misener said. That means the $150,000 exemption would “deny the states nearly 30 percent of the newly available but already owed sales tax.”

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