05/03/13: The end of tax-free sales online

This op-ed appeared in The Virginian-Pilot on the date shown.

THERE HASN’T BEEN much for Gov. Bob McDonnell to smile about lately. Little by little, information regarding his relationship with Star Scientific and its CEO, Jonnie Williams, has been divulged. Now the FBI is investigating.

There has been one bright spot, though, from one of the most unlikely places: Washington. The U.S. Senate has advanced a bill that would force online retailers to collect state and local sales taxes and send that money to the states. A vote is expected next week, when the Senate returns from vacation.

If passed, Virginia stands to collect about $251 million during the next fiscal year. Of that, nearly $170 million would go toward transportation as a part of the bill passed earlier this year.

When McDonnell announced his transportation plan, almost no one expected the Internet sales tax to come to fruition.

One state delegate, Mark Keam, a Democrat who represents part of Fairfax County, warned that it would never happen. He had spent years working on the issue when he was chief counsel to U.S. Sen. Dick Durbin in the early 2000s. “No bill has even been introduced yet,” Keam said in January. “And even if it is, there’s no way it will pass by July.”

To add insult to injury, much of Virginia’s congressional delegation also was against the measure.

A few months later, not only do we have legislation, but both of Virginia’s senators voted in favor of ending the debate last week and indicated they support its passage. And while the House of Representatives presents another hurdle, Reps. Morgan Griffith (9th District) and Scott Rigell (2nd) are co-sponsors of the bill. Bobby Scott (3rd) has expressed support for the measure.

How did we get here so fast?

As more and more transactions take place online, less revenue from the sales tax is going to the states.

According to the U.S. Commerce Department, about $226 billion was spent on Internet shopping in 2012, an increase of 16 percent over 2011. The current law requires online retailers to collect sales taxes only if they have a physical presence in the state.

The National Conference of State Legislatures estimates that states lost about $23 billion from untaxed Internet sales last year. It is no surprise that governors, including McDonnell, have lobbied hard for the authority to collect these taxes.

Actually, taxpayers already owe to the states the sales tax on online purchases. Nearly all states that have a sales tax also have a consumer use tax. In Virginia, consumers have two ways to pay the use tax, for which they are liable if they made more than $100 in purchases during the year for which they did not pay sales tax. Consumers can either file Form CU-7 by May 1 each year or report the amount on Schedule ADJ, line 21, of their Virginia income tax return.

But few individuals pay the consumer use tax. In 2009, $1.5 million in consumer use tax was reported on Virginia income tax returns. A mere 0.6 percent of the returns filed reflected any use tax at all.

The days of tax-free Internet sales are quickly coming to an end.

Legislators have crafted a bill that attempts to make the collection as easy as possible. It exempts small retailers — those with less than $1 million in sales, a threshold that some expect will be higher in the final version.

For those who will be required to collect the tax, free software will be provided to calculate the correct amount of sales tax for any state and/or locality in the country. A single entity in each state will be designated to receive the revenue.

Legislation that was in no one’s sights in January has a really good chance of passage. I’ll bet McDonnell is smiling now.