Sarah Bagby’s 35-year-old independent bookstore so far has weathered the advent of Internet shopping and e-books. Now Bagby, the owner of Watermark Books & Cafe in Wichita, Kan., is closely following debate in Congress over a bill that she says would help her stay competitive with online retailers who are able to undercut her prices by not charging state or local sales taxes.
“I’m giving a 10 percent advantage off the bat to any company that doesn’t have to collect sales tax, so from that perspective it’s just a fairness issue,” Bagby said in an interview Tuesday.
The Senate is expected to vote this week on the Marketplace Fairness Act, which would give states the authority to collect sales taxes for online purchases. Current laws allow states to collect taxes only from retailers with physical presences in their states, resulting in the loss of a projected $23 billion in sales tax revenue nationwide for 2012, according to a 2009 University of Tennessee study.
In addition to closing the tax loophole for e-commerce, the bill would affect non-electronic transactions across state lines, such as catalog sales.
Retailers would use software programs to charge the appropriate state and local sales taxes based on customers’ billing addresses.
Businesses that make less than $1 million in annual out-of-state sales would be exempt, and residents of states that have no sales taxes wouldn’t have to pay unless their states decided to opt in.
Supporters hope that the legislation will cut down on the practice of “showrooming,” in which consumers go to stores to check out products they want to buy, then go home and purchase them tax-free from online retailers.
“From our vantage point, this is about a free market and allowing all retailers to compete on a level playing field,” said Jason Brewer, a spokesman for Retail Industry Leaders Association, a trade group in Arlington, Va.Opponents warn that the legislation would create a compliance nightmare for small businesses, which would have to keep track of more than 9,000 state, local and municipal tax codes.
The bill puts small businesses at risk of being audited or forced into tax court in faraway states, said Brian Bieron, senior director of global public policy at eBay Inc., one of the legislation’s most vocal critics.
Bieron acknowledged that software programs make it easier for retailers to calculate taxes but he said that was only the first step in a complex bureaucratic process.
“The idea that there’s a technology solution that’s perfect . . . that’s like a fairy tale world,” he said. “It’s when the small business gets a demand letter or audit notice or a letter saying you have to appear in tax court 3,000 miles away – that’s the problem, and there’s no app for that.”
Bieron said eBay wanted lawmakers to increase the small business threshold either to $10 million in annual out-of-state sales or to 50 employees. “We think that’s a much more realistic dividing line,” he said.
In remarks on the Senate floor Tuesday, Senate Minority Leader Mitch McConnell, R-Ky., said he planned to vote against the bill, which he characterized as a new Internet tax.
“If states decide they need this revenue, they should keep in mind the tremendous burden they’ll be placing on the little guys who do so much to drive this economy,” McConnell said. “In my view, the federal government should be looking for ways to help, not hurt, these folks.”
Also speaking out against the bill was Senate Finance Chairman Max Baucus, D-Mont. Senate Majority Leader Harry Reid, D-Nev., bypassed Baucus’ committee to take the legislation directly to the Senate floor this week.
Baucus’ state is one of a handful that don’t collect any sales taxes, including Delaware, New Hampshire and Oregon. Alaska has no state sales tax, but some local governments in the state do.
Sen. Mark Begich, D-Alaska, said in an interview Tuesday that he was leaning toward voting for the bill. He’d been hesitant until the threshold to exempt small businesses was raised from $500,000 to $1 million in annual out-of-state sales.
That change convinced him that few small businesses in Alaska would be required to remit sales taxes to other states. “It’s going to be such a small percentage that it’s not even going to register on the radar screen,” he said.
The Senate is expected to vote on the bill this week. Next it will head to the House of Representatives.