Lame Duck Amendment to Defense Bill Could Sneak in Internet Taxes

Published December 6, 2012

A bill to fund the U.S. military could end up allowing states to tax consumer purchases made over the Internet.

An amendment to the National Defense Authorization Act that Senators Richard Durbin (D-IL) and Mike Enzi (R- WY) have introduced during the lame duck session of Congress would add their Marketplace Fairness Act proposal to the bill. If passed with the amendment, the bill would allow states to collect sales tax on Internet purchases, even if an online retailer has no physical presence in the state.

The response from Internet sales tax opponents was swift.

“This proposal, and other online sales tax collection proposals like it, would allow states to penalize the innovative e-commerce business model by targeting small online businesses as convenient sources (and collectors) of revenue,” said Ed Black, president & CEO of the Computer & Communications Industry Association, in a statement.

‘Nexus’ Obstacle

One of the main arguments against proposals like the Marketplace Fairness Act is that it violates the U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, which held a state must prove a company has “substantial nexus” in the state before taxes can be imposed. Since this ruling the nexus or “physical presence” standard has blocked imposition of tax collection requirements on out-of-state retailers.

“Severing the relationship between taxation and physical presence would be a fundamental transformation in how we consider taxes,” Black said. “Such a significant step deserves more extensive consideration than attachment to the unrelated Defense Authorization bill.”

He added, “What we need are pro-growth policies that foster innovation and progress — rather than protecting existing business models at the expense of consumers and growth.” 

Supporters of online taxes argue they are needed to restore a balance between online and bricks-and-mortar retailers.

Governor’s Support

In a December 3 column in the Rapid City Journal, South Dakota Governor Dennis Daugaard wrote, “Online shopping has given every South Dakotan access to more goods and services than ever before, if they are willing to pay for shipping. There is nothing wrong with this. We should not, however, disadvantage our local retailers or our state budget by allowing out-of-state online businesses to avoid paying sales tax.

“We need Congress to act, and I support congressional efforts to simplify and standardize remittance of sales taxes collected from online purchases.”

Eliminating the physical presence standard would undermine tax competition and place an undue burden on consumers and businesses, said Steve DelBianco, executive director of NetChoice, a coalition of trade associations, e-commerce businesses, and online consumers.

“The ironically named Marketplace Fairness Act creates unique new tax burdens on e-commerce sellers, unfairly advantaging big box retailers and e-commerce juggernaut,” DelBianco said in a statement. “Those established power players will further extend their market dominance while their customers and small Internet retailers will be left holding the bill.”