Proposed Online Sales Tax Gaining Momentum and Foes

The end may be near for consumers who avoid paying taxes by window shopping in a traditional brick-and-mortar retail setting to find exactly what they need and then hopping online to make the actual purchase.

As it stands now, most online retailers are not required to collect sales tax, making them an attractive option for consumers. Brick-and-mortar store owners claim that the tax break offers an unfair advantage, hurts their sales and ability to compete, and makes them simply a “showroom.”

Just ask Jack Seibert, owner of Jack Seibert Jeweler in Ohio. Earlier this year he worked with a customer looking to buy a diamond for an engagement ring and took the time to walk him through the process of cut, color, clarity and carat. “He took our information and expertise and turned around and bought a $17,000 diamond online, saving $1,147.50 on sales tax. A diamond at $17,000 is a different number than one at $18,147.50.”

Seibert says the customer then came into the store with the diamond for authenticity verification and to purchase a setting for the stone. “We got a commission to manufacture the ring which was about $3,000.”

But it’s not just the engagement ring that will impact Seibert’s revenue. “Often if we lose the engagement ring, we lose the wedding band purchase, the anniversary presents and other major milestones in customers’ lives.”

Congress is looking to pass an Internet sales tax that allows states to collect sales taxes from any online business. The Online Marketplace Fairness Act would give states the right to collect sales taxes for online purchases. The House Judiciary Committee heard testimony Tuesday on the bill that was introduced last year by Steve Womack (R-Ark.) and Jackie Speier (D-Calif.).

In 1992 the Supreme Court ruled online retailers were only required to charge sales tax if they had a “substantial nexus” or physical presence in the state. The court’s ruling, however, allows for Congress to step in and change the tax rules. Experts say the law was created at a time when e-retailers were struggling to survive in the new online world. Now, e-commerce is the fastest growing sector in retail, and has blossomed to a $200 billion a year industry.

“It’s about a level playing field,” says Jason Brewer, vice president of communications and advocacy at the Retail Industry Leaders Association. “Retailers should be able to compete in a field where everyone has the ability to match a price. Every retailer is in competition with someone, whether it’s online or on Main Street—we all compete on price, but as it stands, online retailers have a 5-10% advantage and we need to close that loophole.”

The Senate bill is gaining bipartisan support and some lawmakers are pushing to have the legislation signed into law by the end of the year.

“It’s a little harder to see how it goes through the House as legislation. The clock is ticking. We don’t have a lot of time,” said David French, senior vice president of Government Relations at the National Retail Federation.

States Need the Revenue

In the past, an online sales tax ran into Republican and Tea Party no-new-taxes opposition, which explains why the legislation might have trouble in the Republican-controlled House. But some lawmakers and governors have shifted their support as a way to drive revenue to struggling state coffers. According to The National Conference of State Legislatures, states lose around $11.5 billion in annual sales taxes from online purchases.

Last week the movement to pass the tax picked up an important ally: New Jersey Governor Chris Christie. The governor endorsed the idea that states should be able to compel online companies to collect sales taxes. In May, the governor reached a deal with to collect sales tax for online purchases for the Garden State. The online giant will open two distribution facilities in the state and bring in a reported 1,500 full-time jobs. In exchange, the 7% sales tax won’t be implemented until 2013.

The shift in support of the tax among policy makers has been quick. As recently as February at the Republican Governors Association meeting the Wall Street Journal reported that discussion on the topic was “decidedly cool.”

Check-out Changes

Elsewhere, opposition to the tax is swelling. In addition to irritated shoppers who will have to pay more for their online purchases, critics say the tax will unfairly hurt small businesses that rely on their online presence to compete with the big-box retailers which already pay taxes in many states. That means the tax will only raise costs for smaller firms.

Steve DelBianco, executive director of NetChoice, a coalition of trade associations opposing the tax, points to a study that shows a small business with a $1 million in sales spends 17 cents of their own money for every dollar they collect for states.

"Seventeen cents is a burden on small business for every dollar they collect. So the costs to collect the state sales tax are like 17 cents for every dollar a small business collects. That's a burden that these bills don't go anywhere to address," DelBianco said during an interview with FOX Business.

"What’s fair is when everyone plays by exactly the same rules. And today, every business, every online, every catalog, and every store, already collect sales tax for every place they have a physical presence. That's a level playing field today."

Critics also charge the tax will complicate the tax system and burden interstate commerce.

"What this bill seeks to impose is to force online and catalog sellers to collect, not based on where they're located, but where the customer lives. That's like forcing stores to have the clerk ask for your ID so he can figure out the tax where you live and file the taxes there. That's ridiculous, but that's the kind of burden this bill is seeing to impose on remote, catalog, and online sellers."