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Online sales-tax measure doesn't click with local sellers

WASHINGTON — Syracuse resident Seth Hiatt, who turned a $2 thrift-store purchase into a multimillion-dollar business, believes a looming sales-tax proposal in Congress could jeopardize his success.

Right now, customers outside of Utah buying CDs, DVDs or other items through Hiatt's eBay store or other Web sites do not pay sales taxes — one of the benefits of making purchases online. But a pending bill in the House and Senate would change this.

Hiatt, along with his wife and business partner, Paula, and other eBay "power sellers" came to Washington recently to urge lawmakers not to support pending bills that would add a sales tax to their customers' online orders. But some lawmakers and retailers are still pushing for the change.

Under current law, states can only require businesses to collect taxes if they have a physical presence in the state. So for Hiatt, someone in California or Maine buying a DVD through his eBay store or his Web site, www.shopsphiatt.com, does not have to pay sales tax, but someone buying the same DVD through www.bestbuy.com would have to pay tax if Best Buy had a store location in that state.

In 1992, a U.S. Supreme Court decision left it up to Congress to figure out who should collect sales taxes on products ordered through the mail or now through the Internet — and Congress is still deciding.

Under current law, taxpayers are supposed to pay a "use tax" and calculate what the sales tax would be on all the items they have purchased and had delivered from out-of- state-retailers. But Neal Osten, who handles the sales-tax issue for the National Conference of State Legislatures, said this is hard for people to understand, and hard for states to enforce.

"There is no easy and fair mechanism for a state to enforce a use tax," Osten said.

In some cases, the cost of enforcing it would outweigh the actual amount of money that the state would collect in taxes, he said. This leaves the 45 states and the District of Columbia that have sales taxes no way to collect their money on Internet sales if the seller is located in another state.

"This is not only fundamentally unfair to Main Street retailers, most of whom are small businesses, but it is costing states and localities billions of dollars in lost revenue," said Sen. Mike Enzi, R-Wyo.

"At a time when states are increasingly turning to the federal government for program funding, it is logical that Congress would instead authorize the states to collect their own revenue instead of raising the federal tax burden to then distribute money back to the states."

Enzi and Rep. Bill Delahunt, D-Mass., have introduced the Sales Tax Fairness and Simplification Act, which would give all businesses the same sales-tax collection responsibility.

"Simply put, if Congress continues to allow remote sales taxes to go uncollected and electronic commerce continues to grow as predicted, other taxes, such as income or property taxes, will have to be increased to offset the lost revenue to state and local governments. I want to avoid that," Enzi said.

An undue burden?

Although the bills show no sign of passing this session, with the lawmakers still lining up co-sponsors and educating others in Congress about the issue, Hiatt, along with eBay — which has 2,500 top sellers in Utah alone — and another Utah-based online business, Overstock.com, want the laws to stay the way they are. But big retailers like Target and Wal-Mart want products sold in a "brick and mortar" store to be taxed the same as those sold via the Internet or mail catalogs.

"This is certainly not the time to impose a major new tax burden on Internet vendors working to implement successful new business models, nor is it wise macroeconomic policy to impose what is effectively a tax increase on American consumers," according to eBay's position statement on the bill.

Enzi's bill would only apply to businesses making $5 million in sales or more. Hiatt's online business does about $2 million in sales, but he says he is still against the bill, because it is a "slippery slope" in how the new rules could trickle down to smaller business. Plus, if his sales increase, he doesn't want to be penalized for making more money.

Hiatt started his online journey in 1999, when he bought an old hand-held electronic football game for $2 at a thrift store. He put it on eBay, and it ended up selling for $78. He started looking around the house for other things to sell, and later, he learned how to buy things wholesale and became a distributor.

He quit his regular job and went to his online business full time in 2003. The Hiatts are platinum power sellers on eBay, meaning they sell $150,000 a month and have good feedback from people who have purchased items from them.

Hiatt said part of the problem for online businesses in applying sales tax is there are 7,500 different tax jurisdictions across the United States. Each one can define items — and tax them — differently.

Those businesses would face a lot of paperwork, particularly in filling out tax returns for all the states where customers bought items, tracking the taxes and applying them correctly.

"The burden on the small businesses is huge," Paula Hiatt said.

Different tax definitions

Seth Hiatt said the $5 million "small business" definition is unique to this bill and "pulled out of thin air." Other federal definitions of small businesses describe larger entities than what the Hiatts have built. He said that under the Family Medical Leave Act, businesses need to have fewer than 50 people to be considered a small business, and the Small Business Act limit is $21 million.

He would much rather see either of those definitions used in a bill Congress would pass to protect smaller retailers like him, rather than the $5 million limit in the language now. "I'm going to be the one filling out all the forms," he said.

The current bill also could force online retailers to raise prices to cover any additional costs their businesses would incur in trying to keep up with the new tax.

Patrick Byrne, chairman and chief executive officer of Overstock.com, said brick-and-mortar stores make use of the local infrastructure, and online businesses do not, so there is no reason to apply a local sales tax to something bought via computer.

"It's the nature of the government to want more," Byrne said. "Since when is the government about fairness?"

Byrne said the different tax definitions among the various tax entities cause problems. A set of skis in one tax jurisdiction can be considered clothing, while another jurisdiction could categorize it as a piece of sporting equipment, which can have a different tax level. He said Overstock.com has 1 million products, and it could take $2 million to $5 million a year alone just to manage the tax definitions, not including what costs it would add to the products being taxed.

Byrne contends that the bills before Congress would benefit mainly big companies such as Target and Wal-Mart. "This is the Target and Wal-Mart Protection Act," he said.

Lena Michaud, Target's senior manager of communications, said the Minnesota-based chain supports the Streamlined Sales Tax Project. She said having sales tax for online purchases "will create a level playing field between all retailers, no matter what their geographic location or whether they sell in brick-and-mortar or online stores.

"Target believes that a glass sold in a store should be taxed the same as a glass sold online. It's a matter of fairness and community vitality," Michaud said.

State coordination

The overall issue of whether sales tax should be charged for online purchases has surfaced in the past. Former Utah Gov. Mike Leavitt, now the U.S. health and human services secretary, strongly pushed for it while he was head of the National Governors Association.

Leavitt, who called the sales-tax system "a mess," wanted to see the money collected from online purchases and for states to reach a common language on what gets taxed.

Utah's Legislature agreed to be part of the Streamlined Sales Tax governing board, which was created to establish uniform definitions and make the overall sales-tax system simpler for businesses. Since 2005, 22 states have been working together on the project.

Congress would still need to approve a law so that states agreeing to the streamlined tax could require businesses not located in their state to pay sales taxes for online purchases, which Enzi and Delahunt hope to accomplish through their bills.

Utah Senate Majority Leader Curt Bramble, R-Provo, was recently appointed to the board. Rep. Wayne Harper, R-West Jordan, and Utah State Tax Commissioner R. Bruce Johnson also are members.

Bramble said he supports a streamlined tax, but there are still unanswered questions about how a tax would be applied. For someone purchasing a CD online, how do you define the tax where the purchaser is located? With the 7,500 taxing jurisdictions throughout the nation and without simplifying the tax codes, it would put the burden on businesses to figure out how to apply the tax.

There is also a question of whether the rules would apply to all businesses or just those in streamline streamlined agreement states. Bramble said he would prefer that businesses in the 22 streamline streamlined agreement states only be affected by a change in the law.


E-mail: suzanne@desnews.com