Bid to collect online sales taxes is stalled in Congress

Every year, Roberton Williams combs through his credit card receipts and meticulously tallies up how much sales tax he owes from purchases he made online.

Williams, by his own admission, is “one of those crazy people” who actually pay online sales taxes.

Few Americans realize they’re supposed to declare any out-of-state purchases made over the Internet on their state tax returns. And even those who do know rarely pay.

“I may well be the only fool in the world,” jokes Williams, a senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute, a centrist research center.

He once asked a tax official in his home state of Virginia how many people paid online sales tax. About 1 in 10,000, was the reply.

Many consumers have come to expect tax-free shopping as an online perk, but it’s costing state governments nationwide an estimated $23 billion in annual revenue, according to a 2009 University of Tennessee study.

In South Carolina alone, state and county treasuries are projected to lose $99.9 million in uncollected sales taxes during the fiscal year that begins July 1, according to estimates by officials at the state Revenue and Fiscal Affairs Office, a successor to what was the former Budget and Control Board.

That’s nearly one of every four dollars in such sales in the Palmetto State, they estimate. Overall, online sales will total $415 million in the year starting July 1, according to their forecasts.

And brick-and-mortar retailers complain that it puts them at a competitive disadvantage to online-only businesses that don’t have to charge sales tax.

A tax break given online retailer Amazon for sales inside South Carolina is set to expire Dec. 31. It was among a package of exemptions the company received from state and local officials in 2011 to open a distribution center near Cayce with a payroll that executives recently said approaches 2,500 employees.

Amazon customers in South Carolina receive notices annually of the sales taxes are due on the goods they bought. But no one is sure how much is paid since those notices aren’t shared with state officials.

At issue nationally are laws that allow states to collect taxes only from retailers with physical presences in the buyers’ states. A bill that would have closed this loophole by requiring businesses to collect state and local taxes from online shoppers sailed through the U.S. Senate two years ago this week with bipartisan support, 69-27.

But the legislation, called the Marketplace Fairness Act, died in the U.S. House of Representatives.

An effort to revive it is stalled in Congress, hampered by the reluctance of many Republican lawmakers to prioritize anything that looks like a new tax.

It doesn’t help that a coalition of conservative groups has condemned the bill as “bad news for conservative principles and the cause of limited government.”

The 18 groups – including FreedomWorks, Heritage Action for America and Americans for Tax Reform – sent an open letter to the Senate in March, shortly after Sen. Michael Enzi, R-Wyo., reintroduced the Marketplace Fairness Act.

The letter warned that the bill would allow a massive expansion of states’ taxation authority beyond their borders, creating “a very slippery slope for states to attempt collection of business or even income taxes from out-of-state entities.”

Even Senate Republicans who supported the bill in 2013 – such as Missouri’s Roy Blunt – might have a hard time defending it to the party base when they run for re-election. Blunt, who’s seeking a second term in 2016, said the bill would simply enforce tax laws already on the books, not impose new taxes.

“It would be fine with me if every state that says this is a tax that has to be paid wants to repeal it,” he said, “but you don’t have laws on the book in democracies that work that everybody can violate.”

For now, the issue is stuck in the House Judiciary Committee, which has jurisdiction over state taxation affecting interstate commerce. The main point of contention has been whether the sales tax charged should be based on the rate where the buyer lives, as advocates of the Marketplace Fairness Act prefer, or on the rate where the seller is, an alternative offered by House Judiciary Chairman Robert Goodlatte, R-Va.

Lobbyists familiar with fruitless negotiations to find a compromise say retailers consider Goodlatte’s latest proposal so unworkable that they worry it’s actually intended to derail the entire process.

Retailers are hinging their hopes on a bill being drafted by Rep. Jason Chaffetz, R-Utah, that would place limitations on states auditing businesses outside their borders. The language comes in response to complaints from online vendors such as eBay and They say the Marketplace Fairness Act as proposed by the Senate would create a compliance nightmare for small businesses, which would have to keep track of more than 9,000 state, local and municipal tax codes.

Chaffetz’s compromise bill isn’t a free pass for businesses, said David French, senior vice president of government relations for the National Retail Federation. “It just means you won’t have 500 jurisdictions coming and harassing you. . . . But the goal is to limit the amount of regulatory burdens that businesses have to deal with.”

Staff Writer Tim Flach contributed.