The U.S. Senate Commerce Committee, which is considering two controversial issues related to Internet taxation, was told last week by online retailers that dot-coms shouldn't be forced to collect sales taxes unless state tax rules are simplified and retailers receive some reimbursement for collection costs.
Barring "substantial simplification" that creates more uniform tax rules at the state level, imposing sales tax collection obligations on Internet-based retailers that don't have widespread physical operations would create "an unreasonable burden," claimed Robert Comfort, vice president of tax and tax policy at Amazon.com Inc. in Seattle.
Comfort, in an interview after he testified at a Commerce Committee hearing, said complying with any tax collection requirement would also be expensive - potentially costing millions of dollars in software development and personnel expenses. States can't "reasonably ask us to become a collector of their taxes . . . and make us bear the whole cost," he said.
Older Rules Easier
Under two previous rulings by the U.S. Supreme Court, a business isn't required to collect sales taxes unless it has a physical presence in the state where the customer resides. State governments are trying to get Congress to change that restriction, fearing that they will eventually lose significant sales tax revenue if so-called remote sellers continue to be given a free pass from collecting taxes.
At last week's hearing, the Commerce Committee heard conflicting views on how to approach the Internet tax issue. But other corporate executives who testified backed up Comfort's contention that companies can't begin to consider collecting sales taxes until the rules are simplified. The retailers want one tax rate per state rather than having to deal with thousands of taxing districts and uniform definitions from state to state on what constitutes a taxable item.
"Allowing state and local governments to unleash economic anarchy . . . could have long-term devastating effects on the economy, business and employment," said Frank Julian, operating vice president and tax counsel at Federated Department Stores Inc. in Cincinnati, which owns Bloomingdale's, Macy's and other large retail chains.
Also permeating the hearing was the dot-com shakeout that has resulted in the shutdown of numerous e-commerce ventures and cutbacks at Amazon and other top online retailers. "The Internet economy is not bulletproof," said Sen. Johhn McCain (R-Ariz.), the committee's chairman. "The plunge in the Nasdaq is a clear sign that we need to be mindful of the economic effects of our tax policy decisions."
E-Retailers Want a Simpler World
Online retailers say they're willing to collect sales tax if certin conditions are met:
*They are reimbursed for some portion of their tax collection expenses.
*There is one tax rate per state instead of thousands of taxing districts that currently exist.
*All states agree on uniform definitions of what constitutes a taxable item.
The Commerce Committee is mulling a pair of tax-related issues: whether online retailers should be required to collect sales taxes, and whether the Internet Tax Freedom Act of 1998, which barred "new and discriminatory" taxes singling out e-commerce transactions, should be extended beyond its scheduled October expiration date.
McCain voiced reservations about forcing remote sellers to collect sales taxes. "I have not seen evidence of the sales [tax] revenue losses predicted by the states and local governments," he said.
But he conceded that brick-and-mortar retailers "have a legitimate fairness argument" when they complain about losing business from customers who want to save on taxes by ordering over the Internet. McCain said he would work to pass "consensus" legislation that incorporates the concerns of all sides in the tax debate.
Tax Burdens May Shift
A group of 32 states is working to develop a sales tax simplification proposal, with officials involved in that process acknowledging that the rules have to be streamlined to make it easier for companies to comply with any new collection requirements. But critics say the effort is becoming too complicated because of disagreement among the states on how to proceed.
Some state officials warn that tax burdens will have to be shifted to other revenue sources if they don't gain the ability to charge sales taxes on e-commerce transactions. For example, Wyoming Gov. Jim Geringer testified at the hearing that retail sales tax losses might be made up by increasing taxes on natural gas and other energy sources.
Geringer also said the states are seeking only to be allowed to do what the federal government already does. Federal excise taxes are collected on Internet transactions such as the purchase of airline tickets, he pointed out.
But Massachusetts Lt. Gov. Jane Swift, who also testified at the hearing, said she opposes any expansion of tax collection obligations on retailers because it could "hinder growth" at e-commerce companies. "It would be a grave mistake on our part to start taxing Internet commerce before it has a chance to establish itself," Swift said.
Online retailers would also have to pay more money to credit card firms if they're required to collect sales taxes, Comfort said. Credit card companies collect a percentage of each bill that's charged, and Comfort estimated that expanded sales tax obligations could increase Amazon's fees by $7 million, based on the $2.76 billion in net sales it reported for last year.
However, Comfort added that Amazon isn't opposed to the idea of collecting sales taxes, provided the rules are simplified. And, he said, the addition of sales taxes on e-commerce transactions wouldn't put online retailers at a competitive disadvantage with brick-and-mortar stores.
"We're confident that we can compete [on the basis of ease and convenience]," Comfort said.
This story, "Online retailers call for simpler tax rules" was originally published by Computerworld.