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Congress heads for internet tax showdown, as Senate ties controversial sales levy to ISP tax

A new Senate bill may force lawmakers this week to make a tough choice on internet taxes: they must agree to expand the reach of sales taxes on out-of-state retailers, or else see the end of a law that forbids states and cities from imposing a tax on internet access.

As the Wall Street Journal reported on Friday, the dilemma stems from Senate Majority Leader Harry Reid’s handling of a bill called the Internet Tax Freedom Act. That bill, which passed the House by a large margin, would permanently entrench a temporary moratorium on ISP taxes. The measure is politically popular because it means consumers won’t see “service fees,” akin to those that appear on cell phone statements, on their broadband bills.

Instead of putting the same bill to the Senate, however, Reid has decided to attach it to a proposed law called the Marketplace Fairness Act. That bill, which first passed the Senate last year, would require online retailers to collect tax on sales they make to out-of-state consumers.

The internet sales tax measure has strong support from main street retailers, who argue it is unfair that some online merchants can charge less since they don’t have to collect sales tax. Under current law, retailers have to collect tax only where they have a physical presence.

Critics, however, argue that the Marketplace Fairness Act, first introduced by Sen. Mike Enzi (R-Wy) would impose a burden on internet businesses by forcing them to collect taxes for hundreds of state, county and tribal governments. Elected officials from Oregon and New Hampshire, meanwhile, dislike the bill because there states have no sales tax in the first place.

The situation could come to a head this week if, as expected, Reid brings the bill to the floor of the Senate for a vote. Here is how the Journal’s editorial board (which is vehemently anti-Harry Reid) sums up the situation:

So Mr. Reid will now try to jam last year’s rough draft into law, or else force consumers to accept new taxes on Internet access bills starting Nov. 1, and he’ll have some help from Republicans like Mr. Enzi and Tennessee’s Lamar Alexander.

Minority Leader Mitch McConnell should use every parliamentary tool at his disposal to stop this legislative extortion.

If Senators vote against the bill, there is a good chance the tax moratorium on internet access will expire when a sunset clause goes into effect in November — meaning that state and local governments could begin passing broadband levies.

The outcome is likely to be decided this week or next, before Congress leaves for August recess ahead of November’s mid-term elections.

20 Responses to “Congress heads for internet tax showdown, as Senate ties controversial sales levy to ISP tax”

  1. Jason Simms

    Guess we need this bill. It’s time! Let’s just hope these guys won’t make it all too complicated. Too many laws, they say, are just meant to confuse everyone and not to make things right! The Marketplace Fairness Act will perhaps work best if states make sure to take necessary measures on their part so that internet entrepreneurs don’t feel burdened.

  2. Susan Lindsey

    Based on the 2013 Census Report, online is 6% of all retail. Of that amount, right around 90% is controlled by giant big box retailers such as Wal-Mart, Best Buy, Macys, Home Depot, Amazon (yes, Amazon is most all about big box with its expanding warehouse & other physical presence so that it can engage in the new war among big box retailers – delivering faster through local pickup and online than anyone else).

    What is important about the Census Report figures is that the 6% proportion of online in relation to all retail has pretty much stayed the same during the last five years. All retail is growing. At this time, the 6% is around $260 billion gross. What’s really important to note is that the percentage of giant retailers selling online is GROWING & the percentage smaller business online business is SHRINKING. In fact, since the 2008 downturn, more smaller businesses have been going out of business than have been starting up because there has been virtually no help for small business America. Not only does the MFA particularly hurt minorities and women, but it would accelerate the shrinking the middle class.

    How much are we REALLY talking about. $260 billion gross and around $24 billion gross sales from the smaller retailers. When you calculate the percentage of use tax owed, we’re left with $4 billion. When you deduct the B2B, there’s around $2.8 billion use tax to collect. If we were to have in place lower limits to protect 50% of the very small online sellers, the $2.8 billion quickly shrink to much less. When you divvy up the use tax that would actually be collected among the 45 states, over 560 Native American Sales tax districts, and the territories, it is a far cry from the windfall that the states claim would occur. It seems that legislators can’t calculate math except when it comes to big lobby funds that they can pocket themselves. In fact, if you look at the Senators that voted for and passed the MFA last May 6, 2013, the vote followed the money. And that’s pretty much what’s happening today and why Senator Enzi is getting support to hold Net Neutrality hostage to passing the MFA!

    So, folks, talk by legislators and governors (who by the way also accepting big lobby funds) about $2 billion or $100 million sale tax generation is more than inaccurate. It’s absurd! “Copy” that please. “Inaccurate & absurd, over and out.”

    In fact, there’s so little to go after that the state auditors have mostly NOT been collecting the use tax from their in-state residents that buy out of state. By law, that’s how the use tax is supposed to be collected – the state auditors are supposed to collect it. And when there is enough, they will do so. Considering an intrinsically organic solution of “supply and demand” has been completely ignored because the MFA has become so highly politicized.

    So what does the MFA really accomplish? Because the buyer can be identified, it targets and discriminates against the smaller online sellers. Scapegoating the smaller online seller is fueled by the fact that the giant retailers that are experiencing 32% decline in the malls. So these giants are hungry to grow their sales even more on the Internet so as to please their shareholders.

    The fact is that the giant retailers don’t care that many mom and pa and smaller businesses will end up closing their doors. Nor do they care that we state tax payers will be paying yet more to subsidize the growth of these giant retailers. Why? Because if you think that Obamacare was a hair-brained idea, the MFA has it beat. It’s a hugely complicated piece of legislation that would accomplish very little, so little that the use tax collected won’t cover the costs to the smaller businesses and the implementation costs that would have to be paid by the state taxpayers. Yes, we would all once again be providing subsidies to prompt the increased profits of giant businesses.

    Also, right around 40% of all local business must also sell online. Once again, the giant retailers don’t care that the MFA is pure and simply a small business killer! After all, they’ve been going after the local small businesses for years. Now they can get those that have figured out to stay competitive by also selling online. Quite a bonanza for the giant retailers!

    Giant retailers back the Marketplace Fairness act (MFA) because it doesn’t adversely affect them and would only help them. They already pay “sales tax” because of their ubiquitous nexus throughout the country. Now, are they submitting use tax (out-of-state buyer’s sales tax that buyer owes back to home state) to their local sales tax district? NO. And in fact, the biggest reason for the uncollected use tax occurs in the giant brick and mortar retail boxes that support the MFA. After all, the brick & mortar is where most the retail buying still is occurring.

    However, the use tax owed because of brick & mortar sales is being ignored for two reasons. First, the b&m make out-of-state buyers pay the store’s own sales tax district. The buyer still owes use tax back to the home state for collection by state auditors. Which brings us to the second reason – the auditors don’t want to go after residents because, unless residents declare their out-of-state sales using the right place on tax forms, the auditors can’t easily figure out who they are. After all, shopping in a b&m is a private, mostly anonymous matter in which the buyer can even pay cash.

    When you talk to states, they come up with lost of reasons why they don’t collect the use tax from their own residents. Here are some. First, state residents often don’t realize that they owe their own state anything. After all, they’ve already paid “sales tax” when shopping in another state. While, educating residents would help, there’s the issues of owing only amounts greater than the tax already paid to another state. And there’s the time and money required to educate folks. In fact, states cite these reasons as support to enact the MFA. Regardless, the problem continues to be that ,with the Internet comprising but 6% of all retail sales, there’s only 10% of all Internet sales for which “sales tax” is not already paid, with the actual amount available not amounting to much at all.

    Regardless, many states are fine with the online sellers collecting for them & don’t appear concerned about the consequences that this use tax collection would have on the smaller sellers.

    Let’s consider what the MFA would require of the smaller online sellers. The MFA wants the smaller online sellers to become the use tax collector for 45 states in which they don’t live.

    When legislators pocket lobby funds they quickly believe soft are companies that stand to make small fortunes through their software usage. They believe that software is free and that it’s simple to use. Remember when Obamacare made the same claim? We’ll the MFA has Obamacare beat!

    Not only would these sellers code everything in inventory according to 10,000 + sales tax districts throughout the country, something that can’t be automated, but they would also pay between $30 and $400 thousand to implement supposedly free software that mostly doesn’t exist. In fact, the costs to create a solution for custom built web stores would be absurdly cost prohibitive. And if the smaller online seller makes a mistake, they could be subject from audits from 45 states in which they do not live. Smaller online sellers would not only be forced to deal with taxation without representation, but the audit consequences could be so substantial to close door! The exact consequences would vary state by state. Auditors could go after private as well as business assets, as well.

    Furthermore, the MFA would destroy our inter-state commerce in ways that is not being discussed. Why? Because big government wants to tax every sliver possible regardless of the consequence. What would be the consequence to we Americans? The Commerce Claus of our Constitution would be destroyed. Big government could dictate how states tax and control taxation at every level.

    Finally, the MFA would destroy opportunities available to minorities, women, and members of the middle class. The Internet has been the last bastion for middle class folk to start up a business and grow it. Instead, the government wants to control & regulate the Internet even more! It would represents a huge erosion of our liberties!

    These giant businesses have been convincing legislators to vote “yes,” in the tune of over $100 million lobby funds. The senate passed the law 5/6/13 without even discussing it. It’s before the house at this time where all these points that I’ve made are fine discussed and where it’s stalled. Senator Enzi has now by-passed the House and wants to get the MFA passed by attaching it to a hugely popular and well-known Net Neutrality Act. That’s plain and simply shameless!

    We Americans need to say “no more” to big government aligned with big money. We need to demand that support be given to help small business America. More small businesses are closing than are starting up. This is horrible because over 52% of jobs are created by these smaller businesses. In contrast, the giant retailers offer tough minimum wage jobs and outsource most of the rest!

    We need less big government aligned with bis business, not more! We nee to protect our free Internet. We need more liberties, not fewer. Working together we can take back our country. We must take action now!

    Tell your congressman whom you’ll vote for if they support the MFA. And tell these giant retailers where you will be shopping if they continue to thwart and kill small business America!

    Join us now at:

    And join, our grassroots organization (sign the letter!)

    Here’s another page:

    Sign petitions – there are more out there so please sign as many as possible by visiting the Oppose Internet Sales Taxes Facebook page!)

    Check out the polls conducted showing majority oppositions by state. Post these polls on fb pages of representatives from you state. Enzi’s act is in the Senate so make sure you include every Senator, please! and post to legislators representing your home state!

    We must take action now! Tell your friends, family, neighbors, colleagues to do the same!

  3. Keith Yockey

    @ swcitizen.
    While fine for a website that only sells a dozen items like yours, MFA does not address automated filing for those that sell multi-channel. There are zero solutions for catalog sellers and non-eletronic sales.
    CSPs have integrated with only 40 of the 300 different shopping carts out there, and not one software provider shares a common taxibility database … such as tieing a products UPC code to it’s taxibility status.
    Audit exemptions are limited to software error only, so look forward to demand letters from all the States if MFA passes.

    • libdlo (DisplayLink)

      A few more things to look for and think about:
      * Small online retailer’s #1 competitors are Chinese direct sellers. Under MFA, few Chinese companies will collect tax or have filing burden because they will be unreachable by states without Fed enforcement (and claim 1 m exemption in any case).
      * Many states say “as soon as you register with us for any reason, you have Nexus with us and must also file income tax” The burden isn’t just hundreds of sales tax forms/year, its also hundreds of more complex income tax forms for every small online business to file.
      * Many / most small businesses are LLC or sole proprietor. For state income tax, Nexus for the business will mean having to file individual income tax return in every state, and having it all subject to audit by every state
      * Big companies who are doing what MFA asks small companies to do have tax and accounting departments of at least a half dozen, if not many dozens, of people
      * Because the margins of online retail are so low, and the cash needs for inventory so high, many online retsilers at $1 M sales can’t yet afford their first employee. It’s usually the owner or husband/wife doing everything at that point, just trying to clear one salary to sustain themselves

      The MFA as its currently written in the Senate would make the US tax system the most complex and hostile system to online businesses in the world, being 50 systems not one. The clear winners would be big companies who would face fewer small competitors online, and tax service companies. They, along with the states, have the power to push the MFA through despite the huge increase in regulatory and tax burdens.

      • Keith Yockey

        @ libdlo
        I disagree. It’s WalMart, Amazon, and other BigBox.coms that are the ‘enemy’ (support MFA) Their goal is suppress the online sellers. Follow the Lobby $$.
        Chinese sellers a threat? Only if the consumer is willing to wait 4-6 weeks for delivery.

        Point#2: MFA addresses Sales Tax only. States are prohibited from any other taxing ‘nexus’. That said, like the $1M exemption, look for both of those rules to be modified. It is rumored that the proposed House Bill has zero exemptions. I await it’s publication for debate.

        Your other points I agree with. $1M gross sales is too small. They should tie to to SBA definitions of a small business

        • libdlo (DisplayLink)

          Hi Keith – Unfortunately, #2 is worse than you think. “Currently, about half the states impose a franchise tax, either in conjunction with, or in lieu of, an income tax. In general, a taxpayer with sales tax nexus will be subject to the state’s franchise tax.” –

          Also see Bloomberg BNA’s survey if you can get your hands on it: The states are aggressively expanding assertion of nexus over out-of-state businesses. They’re trying to ensnare nearly every online business, even ones who have no voting representation in the state.

          The MFA, without simplifications like SSUTA and BATSA required in return, is just an amazing tax complexity and paperwork generation machine. Unfortunately, as we know, big business and some service providers will benefit from that complexity.

  4. Keith Yockey

    Draft Bill????? S743 passed the Senate 74-23 last year. It is not a draft Bill
    Why the do-over? Let ITFA pass as a stand alone Bill.

  5. Actually my small business using freely available modern technology easily automates sales tax processing for all states that have already simplified their tax policies. Thanks to the standards and policies set forth by SSUTA 24 states have already certified several Certified Service Providers to automate merchants sales tax processing. Some of them do charge and are designed for larger enterprise environments. I have however have chosen to use the FREE solution that requires minimal integration since it is pre integrated into most popular shopping carts and checkout platforms. That means in less than twenty minutes I enabled my online business to seamlessly automate sales tax for all 24 SSUTA states. For those Non-SSUTA states I maintain Nexus in the process is also much easier than it ever was. Since the legislation has not yet passed some larger platforms such as Amazon, eBay and others who maintain differing political opinions regarding the subject seem to be waiting even though the technology is freely available. Since it is pre integrated there no need for complicated and expensive software integrations.

    The real burden for online retailers today is the constant changing and redefining of nexus standards by states legislatures determined to reverse the increasing trend of sales tax evasion on Internet purchases. Absent action by Congress internet merchants will soon be burdened with a quagmire of individual States’ nexus laws. Without passage of Federal legislation non-SSUTA states are already testing the waters and demanding tax information from businesses outside their jurisdictions. States such as PA recently confused millions of online merchants passing legislation stating all sales made to PA are taxable.

    The technology and policy standards are already in place. Currently 24 states continue to prove there is a solution being used by many many Internet retailers today. The remaining states are all working towards simplifying their sales tax policies to be in accordance with the requirements of the Federal legislation. The good news for Internet merchants is any state seeking remittances of sales taxes from out of state merchants must first comply to the simplification standards set forth in the legislation. If they do not, then they can not compel remittances of sales tax on remote sales until they do. Even better, States will be limited to audit only CSPs records.

    So for now I am extremely happy that all my monthly remittances for all 24 SSUTA states are completely automated. In addition since using the CSP services I have never been audited once in three years, nor will I ever be audited since the CSP assumes complete liability and the states as part the simplification process must indemnify merchants against all audit risks. CSPs also maintain all current sales tax data for merchants so they no longer are burdened with changing rates and definitions.

    Opponents of the legislation do not want to acknowledge the existence of the services mentioned, and maintain an extreme state of denial in defending their too burdensome argument. After all why would they support any technology or legislation that strips them of there unintended 6%-8% price advantage.

    Thanks to SSUTA and freely available modern technology sales tax remittance has never been simpler.

    • libdlo (DisplayLink)

      The account swuscitizen is the same person as FedTax. It is R. David L. Campbell again, posting under another pseudonym. The MFA as passed by the Senate doesn’t require states to comply with SSUTA, even if things were as described by Mr. Campbell.

    • Bill Jensen

      No @swcitsen is none other the Rev. Sten Wilson from the First Church of Sales Taxes and States Rights. This is just one of his standard sermons of just how wonderful his free and easy software is baa baa baa. He just keeps preaching the same good news of how we are all going to save the poor down trodden States from their evil tax evading citizens. Yes it is easy for some businesses that use the few supported shopping carts. With some it might be free for them if TaxCloud supports their cart. However there are hundreds of carts not supported. So these business are just out of luck with the free which also most likely includes not easy . Then there are the custom shopping carts and backend systems and more that no CSP has software for. So good luck converting most of these e-business to your church.

  6. darryl

    Proponents of this bill say it will be easy. REALLY? Have they ever tried to integrate tax software into a customized shopping cart? LOL!! Like “OBAMACARE“ easy? Even if we take them at their word “only one state tax rate” and “perfect running software to calculate”, HOW DO PAYMENTS GET REMITTED to all 46 states? Do we write 46 monthly checks? Fill out 46 separate monthly sales tax returns?


    Not all small merchants are order automated and to input additional information by hand is both time consuming and interferes with normal business operations. What about audit risk? Can the tax board in Tennessee come after a merchant in Florida? Is it moral to burden an out of state merchant to collect taxes on behalf of a state they don’t live or work or vote in? Why not ask China or Mexico to collect Tennessee taxes? Is this constitutional? Will surely be challenged in the courts, but why this legislation is truly harmful is that in such a weak recovery (check labor participation rate, wage growth, hours worked, etc.) you are burdening the very small businesses that are one of the only sources of growth in our economy. Hiring in this sector will freeze or decline and companies that are mobile and of large enough scale will simply move offshore. Our tax code is already written in a manner that encourages large companies to domicile offshore, this legislation encourages the medium and even portable smaller sized USA businesses to join them in order to compete with websites that won’t have to collect this tax in the Caribbean, Mexico, Canada, etc.

    The tax revenue collected will come right out of the pockets of the average American family and the extra $$$ our citizens will have to pay means LESS money in their pockets to spend locally.

    In terms of “Fairness”, there is zero entry barrier for any brick and mortar retailer to sell their products online.

    HOW ABOUT AN OPT OUT OPTION? We agree not to ship to states that want us to collect sales tax and then we are not forced to multiple file and take the audit risk? One million dollars of revenue does not make you a big business…….at a 5% profit (small margins are common online) you are making a whopping $50K of gross profit annually……this will ensnare and burden a TON of small businesses if passed in its current configuration.

    • libdlo (DisplayLink)

      R. david L. Campbell is the man behind the FedTax account who comments so quickly on every article like this. He stands to make millions off small businesses who will have hundreds of tax forms to file annually under this system. He has a track record of overstating his company’s solutions and understating the problems. Google it.

      • Let me start off by pointing out, i did not mention our service at all – i was simply commenting on the policy matter.

        But, given your challenge to readers, yes, please google TaxCloud!

        TaxCloud is the only free service, full stop. We used to be online retailers, and in that role we were annoyed and frustrated by sales tax compliances burdens, so we decided to do something about it! We sincerely appreciate the concerns of the emainstreet group, they are exactly why TaxCloud exists.

        Sadly, our company and our free service has been targeted by the emainstreet group as the apparent “enemy number one”, so we are attacked constantly and relentlessly by their members.

        Here’s a fact no one can refute: states are doing everything they can, on a state-by-state basis, to get online retailers to collect the sales tax that is legally due.

        Here’s another fact that cannot be refuted: absent intervention by Congress, the compliance environment for multi-state retailers is getting more complicated, not less.

        Attacking our free service only hurts TaxCloud (the only free compliance option), but it will not change the two irrefutable facts.

        As a retailer, if you don’t want to use our free service, then please don’t sign up.

        But if you are a retailer, and you have already received letters from CA BOE, PA DOR, or CT DRS (to name a few), you may want to seriously reconsider opposition to congressional intervention. You may also want to consider joining the more than 6,000 retailers already taking advantage of our free service to easily ensure compliance with all US sales tax laws, regardless of any action (or inaction) by Congress. If your commerce platform is not among the 60+ platforms already integrated, we will eagerly work with you and your platform to find or develop a solution.

        • libdlo (DisplayLink)

          Read more about FedTax’s agenda and advocacy:

          They mislead by saying it’s all easy with software .. but in almost 10 years of development, their software still doesn’t even support all states and doesn’t even support the top two online sales channels (eBay and Amazon marketplace).

          They talk about the SSUTA, but the Marketplace Fairness Act doesn’t require states comply with SSUTA (it could be a positive if it did!) .. instead, it gives states the out of doing their own thing, which of course states will. The MFA would saddle the USA with the most complex, convoluted, paperwork intensive sales tax system in the world (more complex even that EU VAT tax) .. thanks to the advocacy of people like Mr. Campbell.

        • “Sadly, our company and our free service has been targeted by the emainstreet group as the apparent “enemy number one”, so we are attacked constantly and relentlessly by their members.”

          You have been attacked – because of your long standing misrepresentations about the state of the “software solution” to any one who would listen, including government officals. Your company was saying that the problem was solved while only actually supporting a tiny percentage of the shopping cart solutions out there and this has been going on for years. There is plenty of factual, very well documented critiquing of your company and tactics here:

          Those are facts that can’t be refuted.

          Avalara is also the focus of a few posts, but I (and others) felt that Taxcloud was the worst offender by far.

    • Nothing impedes state sovereignty as-is and that is one of the most laughable arguments to me personally regarding the MFA. Nothing is stopping the states from enforcing their own use tax laws – except that it’s not particularly popular.