BY ADAM IFSHIN
Recently the U.S. Supreme Court declined to take up a recent challenge to state laws governing Internet sales tax collection, leaving lower court rulings to stand as law. For some observers this may have been a surprise. While one lower court upheld a New York state Internet sales tax law, another lower court struck one down in Illinois. By all appearances the stage was set for the Supreme Court to clear the air and make the final decision about who has the constitutional high ground on this issue. As usual, appearances can be deceiving.
The court refusing to hear an appeal is not the same as the court upholding the lower court ruling. By refusing the case, the court is sending a clear message to Congress instead: fix this problem.
In Quill v. North Dakota (1992), the Supreme Court created a sales tax collection exemption for magazine sellers who had no system at that time for collecting sales taxes that their customers owed In that ruling, the majority noted: “[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.”
More than 20 years after the Quill decision, the court is sending a clear message that this is an issue for Congress, and Congress alone, to resolve.
From a legislative standpoint, things look promising. The U.S. Senate in May passed the Marketplace Fairness Act by an overwhelming bipartisan vote of 69-27. The law authorizes states, which have simplified their sales tax laws to require online and catalog retailers ”“ remote sellers ”“ to collect sales tax at the time of a transaction no matter where they are located.
The issue moved to the House of Representatives and was assigned to the House Judiciary Committee under the chairmanship of Rep. Bob Goodlatte (R-Va.). The House bill is sponsored by Rep. Steve Womack (R-Ariz.) and supported by a substantial contingent of large and small businesses as well as state and local chambers of commerce. A parade of Republican governors and legislators around the country have written op-eds, given interviews to local and national media and even visited their federal counterparts in Washington, DC to advocate for the bill.
Warren Buffett and Bill Gates spoke in favor of the legislation during a joint interview on CNBC. The editorial boards of The New York Times and USA Today published articles strongly supporting fair tax collection and a federal solution that closes the Internet sales tax loophole.
On the heels of all this support, Chairman Goodlatte made several public statements that the issue needs to be addressed. He also recently released a series of principles to guide legislation on this issue. Among them he included the notion of fairness: all retailers should face the same tax collection burdens and none should be unduly burdened.
He included the principle that states should be granted their sovereignty to set and collect their own taxes, but encouraged competition between states to help keep tax burdens low. These beliefs fit with Chairman Goodlatte”™s earlier public statements demonstrating that he is behind this legislation but plans to offer some amendments to the Senate version of the bill.
Opponents have called the $1 million small business exemption in the Marketplace Fairness Act arbitrary and pointed to definitions and expertise from the U.S. Small Business Administration to determine the appropriate level for such an exemption. A few weeks ago the SBA answered the call, publishing a study out of the University of Tennessee showing that a $1 million small business exemption would exclude approximately 98 percent of online retailers and more than 95 percent of magazine sellers while still collecting 57 percent of sales tax revenue on remote sales. The total number of businesses affected would be less than 2,000.
Even more interesting, the study showed that increasing the small business exemption to $5 million would not significantly alter the size of the affected group or the tax revenue collected. That means the vast majority of businesses that would be impacted by the Marketplace Fairness Act are well-established with significant revenue streams. It also suggests that a small business exemption set at $1 million or even $5 million offers effective protection to nurture start-ups and support small businesses.
Even before the SBA published its study results, famed Reagan economic advisor Arthur Laffer had already demonstrated the value of enforcing the sales tax laws already on the books. In his study “Pro-Growth Tax Reform and E-Fairness,” Laffer teamed up with fellow conservative economist Donna Arduin to look at the economic impact of collecting Internet sales taxes and using that revenue to lower more harmful property and income taxes. According to their findings, Internet sales tax collection could add more than $560 billion in gross domestic product and more than 1.5 million new jobs to the U.S. economy over the next 10 years.
After two decades, the time has come to close the Internet sales tax loophole. The only thing standing in the way is the readiness of Chairman Bob Goodlatte and the House Judiciary Committee to show the courage and leadership to bring this legislation to the House floor for debate.
This is one of those rare moments when we need moderates to help Congress break through the gridlock and find common ground. If they do, it could mean billions in GDP growth, millions of new jobs and finally a level playing field for all retailers.
Adam Ifshin is president and CEO of DLC Management Corp. in Tarrytown, a private company that owns, operates and manages a national portfolio of retail shopping centers. He is a trustee and active lobbyist in Washington, D.C. for the International Council of Shopping Centers.
