Congress eyes expanded online sales tax

The Internet continues to be a major engine for growth for America’s otherwise-limping economy. So, naturally, Congress is swinging, into action — to tax it.

The Senate Committee on Commerce, Science and Transportation scheduled hearings Wednesday on the supposed unfairness of some states not charging sales tax on Internet purchases.

A state can tax online sales only if a company has what’s called a “nexus” within that state, which usually equates to in-state employees or a “brick and mortar” store. This criteria stems from the 1992 U.S. Supreme Court decision in Quill Corp. vs. North Dakota, which actually involved catalog and phone sales in the days before Internet commerce.

So if you buy something from Walmart, you have to pay California sales taxes even if the goods are shipped from Arkansas. But if you buy something from a small company in Arkansas that has no physical presence in California, then you’re off the hook for sales tax. The argument is that, because the little Arkansas company receives no benefit from taxes paid in California, it shouldn’t have to collect them. The small company, however, still would have to pay Arkansas sales tax on in-state purchases.

A lot of big retailers, especially Walmart, have cried foul. Amazon, which has no stores, previously was held up as an example of a tax scofflaw that earned billions in profits from California but paid no sales taxes here. But now it’s building warehouses in California and has a deal with the state to begin collecting sales taxes in September.

The Senate hearings Wednesday were to be about the “unfairness” of this situation. Supposedly, small companies are hurt most by the current situation because a neighborhood hardware store, for example, can’t compete with an out-of-state online firm that doesn’t charge state sales tax.

But it’s not so simple, Joe Henchman told us; he’s the vice president of state and legal projects at the Tax Foundation, a research group in Washington, D.C. He is submitting written testimony to the committee. He pointed out that there are not simply 50 state tax jurisdictions to worry about, but 9,600 jurisdictions. That’s because cities, counties and other districts commonly have varying tax rates.

In California, for example, Orange County charges 7.75 percent sales tax, but Los Angeles County charges 8.75 percent. Moreover, many states charge sales tax on food, but California exempts it.

Henchman said that several bills are before both the Senate and the House of Representatives. But none of the bills currently simplifies tax collection down to the level of the states — that is, just 50 tax rates. “The fear is that the states will get this passed but not be forced to simplify (tax rates). That would be especially harmful for smaller Internet providers.”

One major bill is H.R. 3179, the Marketplace Equity Act, sponsored by Rep. Steve Womack, R-Ark. It would allow states, say, California, to collect sales tax from companies in any state on purchases by California residents. But, according to Henchman, the bill would not adopt standardized definitions of commonly taxed goods, nor would it establish federal court jurisdiction for simplification standards, leading possibly to 50 contradictory state court rulings.

He said the political lineup on this issue crosses party lines. Supposedly, anti-tax Republicans from Arkansas, home state of Walmart Stores Inc., the world’s biggest retailer, support the tax. California Democratic Rep. Zoe Lofgren opposes the Internet tax. She represents San Jose, in the heart of Silicon Valley. Most high-tech firms would lose from the tax expansion.

We continue to oppose this sort of tax increase. Among the last things an underperforming economy needs would be higher taxes on consumer spending.