Online sales tax resurfaces in Congress — this time, without a small-business exemption

September 24, 2013

Four months after the Senate approved a controversial bill requiring online merchants to start collecting sales tax, a pair of lawmakers have opened the debate in the House, but with one major change from the original legislation — no exemption for small businesses.

House Judiciary Committee Chairman Bob Goodlatte (R-Va.) and Rep. Spencer Bachus (R-Ala.), a subcommittee chairman, recently released an outline of principles for online sales tax legislation, citing input from taxpayers, trade groups and state and local governments. In it, they argue that lawmakers should take action to level the playing field for brick-and-mortar and Internet retailers.

“Americans across the country are affected by the issue of Internet sales tax whether they are consumers or business owners,” Goodlatte said in a statement, adding that the principles are meant to “provide a starting point for discussion in the House.”

Currently, states have the authority to collect online sales tax, but the onus is on the shoppers, not the sellers, to report the transactions. To date, there’s been little effort to force compliance, yielding what some say is an unfair advantage for online sellers, who can charge lower prices than their brick-and-mortar competitors.

In May, the Senate approved the Marketplace Fairness Act, which would shift the burden from online shoppers to online merchants, requiring retailers to collect the proper sales tax for the state in which each buyer resides. While the bill was being hammered out, critics, including Goodlatte, warned that the change would create an administrative nightmare for small merchants, who would suddenly have to navigate a labyrinth of sales tax rates from country’s roughly 9,600 state and local taxing jurisdictions.

In response, senators added an exemption for online sellers that collect less than $1 million in annual revenue, aiming to shield small businesses from the added tax burden.

Small firms will not receive the same special treatment from legislation being offered by Goodlatte. In the outline, he argues that tax laws “should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary,” scrapping the small-business safeguard in the Senate bill.

One of the leading proponents of the exemption this summer seems to have changed its tune, too.

In a statement sent to The Washington Post, eBay executives said they are “very encouraged that the remote sales tax principles released today by Chairman Goodlatte address concerns that we have raised on behalf of our small business community.”

Earlier, the company’s primary lobbying effort on the Marketplace Fairness Act had been aimed at raising the small-business exemption limit from $1 million in revenue to $10 million.

Meanwhile, the concept of online sales tax remains very unpopular with Americans, with 57 percent saying they support a bill that would allow states to collect sales tax on Internet purchases, compared to 37 percent who oppose it, according to a Gallop poll — creating another major political hurdle as proponents work to drum up support from more lawmakers in the House.

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.
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