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Chaffetz Greases Wheels For Online Sales Tax

Supporters of an online sales tax bill introduced Monday portray it as a compromise that addresses most concerns, but some critics aren’t placated.

The Remote Transactions Parity Act, sponsored by Republican Rep. Jason Chaffetz, would allow states to collect sales taxes on purchases made by residents from out-of-state sellers — something the Supreme Court explicitly authorized Congress to do in a ruling preventing states from exercising that very privilege several years ago. (RELATED: Supply Side Founding Father Boosts E-Commerce Sales Taxes)

Currently, states have no way to collect sales taxes from retailers that do not have a physical presence in the state, such as an office or warehouse. Technically, the tax is still owed by the purchaser, but there is no cost-effective way to enforce the obligation.

Brick-and-mortar stores, which must remit sales tax for every sale, argue this creates an artificial advantage for online retailers, which are effectively able to offer customers a discount equal to their local sales tax rate.

“The current tax loophole skews the free market,” Chaffetz said in a press release. “It allows businesses that employ fewer people and contribute to the economies of fewer states to avoid collecting sales taxes. This not only forces more brick-and-mortar stores to close their doors and lay off their employees, but also requires consumers to shoulder the burden and liability of the sales tax themselves—taxes that the consumer is by current law required to compute and pay as a part of their yearly taxes.”

To ensure the collection process is not unduly burdensome on remote sellers, states would be required to provide software, free of charge, to help remote sellers calculate the taxes they owe. Only once a state satisfied that provision would it be authorized to collect sales taxes from remote sellers. (RELATED: Will Congress Kill Cyber Monday Deals?)

In addition, businesses with under $10 million in sales are exempted from the tax for the first year, after which the threshold falls to $5 million in the second year and $1 million in the third year.

“A broad coalition of large and small businesses, online and brick-and-mortar retailers, and state and local government leaders asked Congress to modernize our nation’s outdated sales tax collection framework,” Chaffetz added. “RTPA would modernize current law and strike the appropriate balance between sales tax parity and a state’s right to manage tax policy within its borders.”

The International Council of Shopping Centers (ICSC) applauded the bill in a press release, saying the RTPA “restores free market principles to retailers by removing the government-sanctioned tax subsidy that is currently given to online-only sellers.”

“The Senate and the House have both spent significant time deliberating this issue,” noted Betsy Laird, senior vice president of Global Public Policy for ICSC. “It is now time for Congress to stand up for local retailers and pass this job creating, bi-partisan, common sense bill.”

Not everyone agrees, though. Jessica Melugin, an adjunct fellow at the Competitive Enterprise Institute, claims in an op-ed for The Hill that Chaffetz’s bill, like other variations it seeks to improve upon, distorts the structure of sales taxation in a way that hurts consumers.

RTPA, she claims, “would give states unprecedented power to reach outside their borders to tax businesses in other states,” since the tax would be calculated based on the buyer’s location. Gas stations, for instance, don’t calculate taxes based on a customer’s license plate.

The real reason most big box retailers support the bill, Melugin speculates, is that they would be better able to absorb the compliance costs than would their smaller competitors.

Instead of a destination-based taxing system, Melugin calls for an origin-based approach by which sellers collect sales tax based on the rate in their home taxing district. States would then separately participate in a revenue-sharing system that sends some of the revenues to the buyer’s home state. (RELATED: The Marketplace Fairness Act will be as Hard to Implement as Obamacare)

Chaffetz, however, counters that such an approach would be excessively complicated, saying his bill would accomplish the same basic objective, but “without completely changing our current state sales and use tax structure.”

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