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Sales tax saga

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WASHINGTON—Two bills before Congress would close a loophole that prevents states from collecting sales taxes on tires and other goods sold over the Internet.

That development, according to the Ohio Tire & Automotive Association (OTAA), would benefit just about everybody.

“If you told me seven or eight years ago that we would be facing this competitive threat from Internet retailers, I would have laughed,” said Gordon Gough, executive director of the OTAA and executive vice president of the Ohio Council of Retail Merchants. “Now, this is Issue No. 1 for a lot of retailers nationwide.”

In an op-ed piece published in the May 4 issue of the Columbus Dispatch, Mr. Gough explained that a 1992 Supreme Court case created the loophole. The high court ruled that states could not collect taxes from out-of-state retailers if those retailers did not have a “physical presence” in the state such as a store or warehouse.

“When the decision was handed down...the Internet we know today was new and untested,” Mr. Gough wrote. “Over the past 20 years, Internet sales have exploded and are still growing.

“This tax collection imbalance gives out-of-state retailers an automatic advantage over 'brick-and-mortar' retailers in Ohio communities,” he wrote. “This has triggered lost profits, layoffs and even bankruptcies and store closings.”

Mr. Gough cited an October 2011 study by the Economics Center of the University of Cincinnati.

Among other things, the Cincinnati study found that the avoidance of Ohio sales taxes by online consumers cost the state more than $200 million in 2011 and $1.1 billion in 2007-2012 inclusive.

To the extent that online consumers buy from the Internet to avoid sales taxes, store retailers in Ohio lost an estimated $600 million in sales in 2011, the study said.

Nationwide, roughly $24 billion in sales taxes go uncollected each year because of Internet sales, according to the National Retail Federation (NRF) on its “Retail Means Jobs” website.

“America's sales tax system unfairly favors online retailers,” the NRF said. “With sales taxes amounting to 10 percent or more in some areas, Main Street retailers are seeing increased evidence that their customers are buying online in order to avoid the tax.”

Particularly galling to traditional retailers, the NRF said, is the phenomenon of “showrooming”—that's when consumers come into their stores to look at merchandise and then order it from online retailers.

“This discriminatory practice undermines not only Main Street retailers but also the communities they support,” the NRF said. “The $24 billion in lost sales tax is revenue badly needed by cash-strapped state and local governments.”

According to the NRF, there are three bills before Congress to address the Internet sales tax question, two of which have attracted serious attention.

Of the two, H.R. 3179, has advanced further, having been the subject of hearings last July in the House Judiciary Committee.

Known as the Marketplace Equity Act of 2011, H.R. 3179 would authorize states to require Internet retailers to collect and remit sales and use taxes, regardless of location, provided that states implemented a simplified system for administration of sales and use taxes for Internet sellers.

States would have to provide a single sales and use tax return for Internet retailers, and there also must be a single revenue authority within the state with which Internet retailers could file a tax return, according to the bill.

There must also be a uniform tax base throughout the state, according to the bill. The legislation would provide a small business exemption to Internet businesses that don't exceed annual sales of $1 million nationwide or $100,000 within an individual state.

The Marketplace Fairness Act, S. 1832, is before the Senate Finance Committee.

The Senate bill authorizes states under the Streamlined Sales and Use Tax Agreement of 2002 to require Internet retailers to collect and remit sales and use taxes. Internet businesses with less than $500,000 total annual sales would have a small business exemption.

Like H.R. 3179, S. 1832 would require a single state agency to administer all sales and use taxes, as well as a uniform tax base. S. 1832 would also relieve Internet sellers from liability if it collects an incorrect amount of taxes based on erroneous information from the state, and would require states to give Internet sellers 30 days' notice of any tax rate changes.

Action on either of these bills during the coming lame-duck session of Congress is possible, according to an NRF spokesman.

Some states—including New York, California and Texas—have passed their own Internet sales tax bills, but those bills have tended to concentrate on Amazon.com Inc., the largest Internet retail company, the spokesman said.

One tire dealer who said he wants to get more involved in the Internet sales tax issue is Will Tolerton, CEO of Terry's Tire Town L.L.C. in Alliance, Ohio. “It's a compliance issue,” said Mr. Tolerton, who has met with Rep. Jim Renacci, R-Ohio, on the matter.



To reach this reporter: mmoore@crain.com; 202-662-7211.
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