Small Businesses Balk at Online Sales Tax That Could See Lame-Duck Action

Posted October 9, 2012 at 12:00am

Members of Congress are facing new pressure to oppose Internet sales tax legislation as proponents try to iron out differences in the leading proposals with the goal of passing a bill in the lame-duck session.

More than 1,300 small businesses that sell their products out of state using the Internet recently formed the We R Here Coalition to lobby against legislation (S 1832, HR 3179) that would require them to collect sales tax on behalf of their customers.

The coalition — named after the tiny residents of Dr. Seuss’ Whoville who collectively raise their voices to be heard — range from individuals selling crafts from their home computers to mom-and-pop shops that go online to try to access a national customer base. It says many of its members would go out of business if they had to track and comply with varying tax laws across 50 states and more than 9,000 local and county jurisdictions.

“We want people to literally know we are here,” Phil Bond, the coalition’s executive director, said in an interview. “Companies are beginning to write letters, make calls, go to town meetings to let their members [of Congress] know we are here. There are these small businesses, not just this faceless group, and they are in your district.”

The We R Here campaign could complicate proponents’ efforts to advance the legislation by the end of the year, perhaps as part of broader budget and tax-cut extension measures aimed at averting the “fiscal cliff.”

So far, lawmakers have heard mainly from proponents of online sales taxes, such as the National Governors Association and the National Conference of State Legislatures, who are pushing it as a way to generate an estimated $23 billion in annual revenue for cash-strapped states.

The legislation would overturn a 1992 Supreme Court decision that prevents state governments from compelling tax collection on retailers that don’t have a physical presence within their borders.

House and Senate staff are “actively working” on unifying the two leading measures, according to an aide for a House Democrat who backs the legislation. Both bills include an exemption for small sellers, but neither threshold is high enough to appease critics.

Defining a Small Business

The Senate measure, introduced by Michael B. Enzi, R-Wyo., would require online retailers that make more than $500,000 in annual out-of-state sales to collect taxes for customers who live in those states that have agreed to stipulations simplifying their sales tax code. The House version, by Steve Womack, R-Ark., differs mainly in that it sets the small-business exemption at a higher $1 million.

“Congressman Womack is very positive about lame-duck opportunities, and staff and stakeholder group negotiations are ongoing and frequent,” said his spokeswoman, Claire Burghoff.

Yet even as the negotiations advance, the question about how high to set the exemption remains open.

Spokesmen for Enzi and Majority Whip Richard J. Durbin, D-Ill., the lead Senate supporter in his party, said all options are on the table as the lawmakers try to move the bill in the lame duck. Still, both offices defended the $500,000 level as carefully selected to encourage small-business growth.

“Senator Durbin remains open to all ideas and input on the small-seller exemption, but is also aware that brick-and-mortar retailers are still required to collect at the first dollar in sales,” Durbin spokeswoman Christina Mulka said.

The We R Here Coalition backs a position taken by eBay Inc., which operates an online marketplace for mainly small retailers, that lawmakers should allow the Small Business Administration to define small sellers. The agency defines small electronic retailers as those with up to $30 million in annual sales.

Proponents of the legislation, including giant online retailer Amazon Inc., say that figure is so high that it would render the bill meaningless. Amazon has put its weight behind the Senate’s $500,000 threshold, saying any higher of a number would give too many smaller online retailers an advantage over big players such as itself.

Rep. Jackie Speier, D-Calif., said the House bill’s $1 million threshold strikes the right balance between helping small businesses and addressing the issue of online taxes.

“The government should not be in the business of picking retail winners and losers by providing up to a 10 percent price advantage to some online retailers for the very same product,” Speier said in a statement. “The internet marketplace is no longer in its infancy.”

Dealing With Myriad Jurisdictions

The We R Here Coalition contends that the legislation poses an additional burden for Internet retailers that offline stores don’t face, since e-retailers would have to collect based on where the customer is based and thus comply with tax laws in thousands of jurisdictions.

“You pay taxes where you have operations. It’s not fair to pay taxes where you pay no taxes and get no services,” Bond said.

The coalition has support from several technology-friendly lawmakers who are concerned that the legislation could dampen the Internet economy.

In the House, Democrat Zoe Lofgren and Republican Dan Lungren, both of California, have authored a resolution (H Res 95) to oppose new tax requirements on Internet companies. Sens. Kelly Ayotte, R-N.H., and Ron Wyden, D-Ore., both of whose states have no sales tax, introduced a companion resolution (S Res 309) and have said it would be unfair for businesses in their states to have to collect tax on behalf of others. Lofgren and Wyden sit on the House Judiciary and Senate Finance committees, respectively, where the bills are awaiting markup.

The emergence of a coalition of small businesses could bring more lawmakers over to their side, eBay lobbyist Brian Bieron said in an interview.

“The more members of Congress realize that small businesses in their state and in their districts are using the Internet to stay competitive, I think they are not going to want to harm those folks with a tax-law change,” he said.