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Can Congress Be Convinced to allow States to Collect Tax on Internet Sales?

After the inevitable defeat of the Marketplace Fairness Act in the House of Representatives, (I was going to use the term, “ignominious”, but I looked it up online and found it’s definition to include humiliating and shameful to be inappropriate. It was just a defeat.), Congress is trying again to allow the taxation of internet sales with the new and improved bill, now called the Remote Transactions Parity Act. Isn’t that a catchy name? Wait, we can use the acronym “RPTA” so it sounds more like a municipal bus and transportation service and thus less harmful.

Image courtesy of SundayMorning  at FreeDigitalPhotos.net

Image courtesy of SundayMorning at FreeDigitalPhotos.net

I apologize up front for describing RPTA as an attempt by congress to tax internet sales. My difficulty is that when trying to explain what some in congress are attempted to do, most people see this as, just another tax. Therein lies the root of the problem. Technically, the Marketplace Fairness Act and the RPTA were and are not attempts to tax internet sales. They are attempts to give teeth to each state’s attempts to tax internet sales transactions where the seller does not have a physical presence in the state where the purchaser resides. Many states already have, what is called a Use Tax that is typically imposed on the buyer in a sales transaction based upon the purchase price.  The difficulty

Image courtesy of cooldesign] at FreeDigitalPhotos.net

Image courtesy of cooldesign] at FreeDigitalPhotos.net

of this type of tax is actually collecting the tax for many internet purchases. Let me give some examples:

  • Assume that you live in Ohio.
    • You purchase a Camera online from Samy’s Camera located in California. Samy’s doesn’t have a store or distribution facility in Ohio and does not charge you Ohio sales tax on the transaction. Do you owe any tax on the purchase? The answer is yes. You owe a use tax to Ohio on the purchase price of the camera.  The problem for Ohio is that, unless you voluntarily report the purchase to the state of Ohio, the state has no way of knowing that you purchased the camera and thus would be unable to impose the use tax on you.
    • Let’s now assume that you just purchased online, that super, fuel efficient and really impressive Tesla. Assume for the purposes of this example, that Tesla doesn’t have any manufacturing, distribution, retail facilities or any other presence in the state of Ohio. When you purchase the car online, Tesla does not charge you sale tax. Do you owe taxes on the purchase? Again, the answer is yes. But the difference between this example and the camera example is that Ohio has a pretty easy way to know that you made the purchase and require you to pay your tax on the purchase. Unless you do not intend to register your car with the state, which is something that I do not recommend, upon registration, the Ohio Bureau of Motor Vehicles will collect the Use Tax upon registration.

      Image source, Tesla Motors

      Image source, Tesla Motors

To many however, my explanation is meaningless. To them, it is an attempt to tax because, from a practical perspective, if passed, it will take money out of their pocket and give it to the state on purchases that you make online that they now,  would not likely pay to the state.

There are and have been a number of trade organizations, including BOMA and ICSC that have strongly supported the Marketplace Fairness Act and now the RPTA. Their support for this type of legislation is rooted on fairness, at least as they see it for their members.  The logic is that if you impose the obligation on internet sellers to collect each state’s use tax on each transaction, internet sellers would not have a price advantage over brick and mortar retailers, who do have the obligation to collect sales tax.

Without arguing the relative arguments in favor or against this type of legislations, let’s take a look at how our trade organizations have tried to pass this legislation and what they might try in the future.

The groups supporting the ability of states to tax online retailers for purchases made by residents have consistently relied upon their direct lobbying efforts to convince congress to support the interests of retailers and the retail real estate community. These groups, have also consistently failed at their efforts. They have been led and have relied upon professional lobby groups who, believe that, by their sheer influence as lobbyists, they can convince a conservative, Republican controlled legislature to allow each state to collect sales tax from sellers who make sales to residents of the taxing state, even though the sellers have no physical presence within the buyer’s state of residence. This is, in my opinion, an exercise in futility.

To be clear and despite the fact that it may be against my own personal interests (I won’t be able to buy tech without paying taxes), I favor the right and ability for states to tax interstate online sales to residents of their states. What I object to is the limited thinking and hubris exhibited by the groups that support the proposed legislation. If you want to get this done, do everything that is necessary to win. Einstein is quoted as saying, “Insanity is doing the same thing over and over again and expecting different results”. Maybe someone should rethink their strategy.

Image courtesy of coward_lion at FreeDigitalPhotos.net

Image courtesy of coward_lion at FreeDigitalPhotos.net

Can you imagine convincing a Republican controlled Congress that this type of legislation should be passed because it is “fair”? Is it reasonable to expect this conservative, anti-taxation Republican led Congress, to be persuaded that giving states the ability to collect more taxes is not the imposition of a tax? This, in my estimation is an incredible uphill battle. It’s like putting your hand up with the expectation that you will stop on oncoming tsunami with your hand. Good luck at that.

In order to get this legislation passed, the members of Congress must be convinced that their electorate favors passage. The electorate are the people who vote our representatives in and out of office. A few letters from real estate brokers and the owners of shopping centers, isn’t enough. Haven’t we already learned that lesson? What is required is a concerted and combined effort by our trade organizations and their lobbyists to, not only to reach out to Congress, but reach out to the people who vote. Let our legislators know, from every corner of their life, that there are people who do favor this legislation.

I believe that the public would object if many of their brick and mortar retailers that the rely upon and buy from were to disappear because they cannot compete with online sales. Imagine, no more window shopping or making a purchase with immediate satisfaction. If every brick and mortar retailer had on display some sort of marketing in support of the RPTA, isn’t it possible, if not likely, Congress would become aware of the public support and not just the support of trade organizations?

This is an example of the massive efforts ICSC offered. Over a year ago, ICSC offered posters and brochures that I could give to my local, brick and mortar retailers in support of the Marketplace Fairness Act. I could only receive three. I gave my three to some retailers that I frequented, including a nice Italian tailor from the old country.  All three retailers are not out of business. I miss them. Now wasn’t that effective!

image courtesy of stockimages at freedigitalphotos.cnet

image courtesy of stockimages at freedigitalphotos.cnet

At the very minimum, there should be a campaign to the public where every shopping center owner provides material to his or her tenants to promote the Remote Transactions Parity Act. Among other things, retailers should put on their shopping bags, logos and other statements in support of the RPTA, (can you imagine your congressperson shopping for groceries and seeing on their shopping bag a notice to support the RPTA or coming home and seeing it on a bag on their kitchen countertop?). Congress should be reminded, at every part and moment of his or her retail life, that this issue is in the face of every person who shops retail. When they and the public can’t hide from it, our representatives will begin to believe that it will be in their best interests to pass this legislation.

Obviously there is much more detail that needs to be thought out, including the cost of such a wide-ranging campaign. But this is what is needed. This is a public service announcement.

Something to Add?

  • RL Thatcher CRX, CSM, CLS, CMD

    Howard, Many thanks for your using your CRE Radio/TV Platform for giving voice to this important issue. You & I and hundreds of ICSC members have volunteered our time and treasure to effect the outcome of this legislative initiative. The legislation continues to enjoy bi-partisan support and significant majority votes for passage in the US Senate. While hopeful in recent times, the bill has died in the US House committee process. I concur that an expanded grass roots approach is a viable strategy. As with any Marketing campaign (or in this case public policy) the messaging is key. I offer the following: 1) It should be a “States Rights” Issue, not federal. 2) Governors are advocates and particularly Republican Governors are quick to say that the revenues generated ($4 Billion/Annum Nationally) could in fact be” Revenue Neutral” wherein, Internet Sales Taxes received could be utilized to offset other forms of taxation within the state or more directly, reduce the rate of State Sales Tax (say from 6% to 5%). 3) Its A Jobs Bill – Plain & Simple and 4) Our Shopping Centers remain the crown jewels of economic development in the markets they serve with robust job creation, and multiple forms of tax revenues including RE Taxes – A vital contributor to Police, Fire & Community Schools – Truly the fabric of life for hundreds of Millions of Americans… Of course, the core message remains – Its Not A New Tax – Its Due & Payable but research indicates a mere 3% are aware and/or actually include an allocation of Sales/Use tax on the annual State form. Research also indicates that 68% of Americans agree and would much rather take care of it at the Point Of Sale rather than attempt to reconstruct there on-line spending when preparing the annual tax returns. Clearly, Brick & Mortar Retail is simply seeking parity with On-line retail. The issue is more legitimate as all retailers strive to achieve a multi-channel structure and Internet retailers seek Brick & Mortar locations as well.

  • hfklaw

    RL, thanks for your comments. My thoughts on your comments are:

    1. While proposed as federal legislation, it really is a state rights issue, allowing each state to determine if they want to require collection of the tax. As far as I can tell, none of the federal legislation requires each state to pursue the collection of the use tax from the point of sale.
    2&3 I like the idea of “revenue neutral” so that each state can apply the tax to offset other taxes. However, isn’t that what the state legislators do already. They are the ones to decide where to put the taxes that are collected, which, of course, is an issue that is regularly in dispute. Nevertheless, the idea of collecting taxes in one place to offset the reduced taxes in another is good for the public perception to sell the public on the idea. One might question the advantage of allowing the collection of the use tax from the point of sale, while reducing the sales tax, but in actuality that is not, in my opinion, a neutral act. I suspect that as such, while it may not increase the actual tax burden to many of the state residents, it will likely directly benefit brick & mortar retail, hopefully improving employment for local residents.

    All in all, your I like your comments and as I have been writing my response, I like them even more.