When Katherine McHenry answers the phone at a Building Blocks Toy Store in Chicago, she may get a caller who wants to negotiate a lower price on an item she is selling because it can be purchased for less money online.
“I just basically tell people I can’t control the fact that I have to charge the sales tax,” said McHenry. “What they’re using for leverage is, ‘I can buy it on the Internet for basically a 10 percent discount’ ” when they don’t pay taxes.
Walk-in stores like McHenry’s are on the front line of a tax war that may be entering a new phase in Washington.
Federal lawmakers in both chambers are showing signs of warming to legislation that would require out-of-state Internet businesses to collect taxes at the rates levied in the communities where purchasers live. A sizable exemption still would allow Internet companies to skip that requirement if they didn’t do $1 million worth of sales in the previous year.
In what was viewed as a breakthrough moment, the proposal was supported last month on a test vote in the upper chamber, in an effort led largely by the Senate’s No. 2 Democrat, Dick Durbin of Illinois.
Critics argue that the legislation would mean more taxes on Americans who are overburdened, but Durbin insists, “We’re not talking about imposing a new tax. Not at all.”
To Durbin, it is “just a question of fundamental fairness.”
In the dozen or more years since the issue of sales taxes on out-of-state Web commerce first surfaced, technology has changed rapidly and “Internet commerce has boomed,” said Max Behlke, the point person on the issue for the National Conference of State Legislatures.
Like Building Blocks in Chicago, other long-established local merchants increasingly are seeing their stores serving as “showrooms” where consumers visit to check out pricey products, ranging from TVs and computers to high-end cameras — and then turn to the Internet to avoid paying sales tax, Behlke said.
“More and more, people are going into stores, looking at products and then buying them with their iPhone, buying it on their BlackBerry, because it’s cheaper,” Behlke said.
That stark storyline played out for a Chicago suburban sportswear business that had survived 18 years but shut its doors last year.
Soccer Plus owner Bob Naughtrip said he and his sales staff saw “showrooming” at the headquarters in Palatine, Ill., and another store in Libertyville, Ill. High-end soccer shoes and other items would be reviewed closely, tried on and then purchased later with a computer.
But beyond the individual sales, the big losses came when huge youth soccer clubs would buy over the Internet. With as many as 1,000 players, a club or league could shift buying patterns that add up quickly when uniforms and gear run from $100 to $300 per player, Naughtrip said.
If buyers can avoid paying the 9 percent total state and local sales tax in Palatine on a $300,000 purchase, for example, the savings is $27,000.
Though the Great Recession and higher property taxes also played roles in the demise of the Soccer Plus business that Naughtrip once thought was “recession proof,” the sales tax issue was a significant factor, he said.
“We’re the poster child of what happens when people buy outside of the area to save sales tax dollars,” Naughtrip said. “They don’t understand the impact on a business like ours.”
Durbin took the Soccer World story to the Senate floor, where he told colleagues how Naughtrip lost his small business and its local jobs.
“If they’re going to have a fighting chance to compete, they ought to be on a level playing field,” Durbin said.
Durbin’s fellow Illinois Democrat, Gov. Pat Quinn, certainly agrees. Quinn, who says Illinois is losing about $200 million a year in state sales taxes through Internet purchases, sent a letter to U.S. House and Senate leaders recently urging action on the issue.
“The exponential growth of electronic commerce (more than 10 percent annually) has resulted in the erosion of states’ sales tax bases and an increased dependence on other sources of revenue,” Quinn wrote.
Durbin’s effort matches a push in the Republican-led House, where legislation also has bipartisan support but faces a potentially tough road even with a GOP lead sponsor, Rep. Steve Womack of Arkansas.
“We’re very hopeful, especially given the Senate’s overwhelming support, that the House will take this on” this year, said Claire Burghoff, Womack’s spokeswoman.
The timing of federal action, if there is any, would be a major factor in determining how much and how quickly states and cities could reap the benefits.
Durbin faces strong opposition from conservatives such as Grover Norquist and businesses such as eBay that say the proposed legislation could hurt small businesses.
“Our view is that the current bill would not protect many small businesses, and that it needs to be improved before Congress takes any final action,” said Brian Bieron, eBay’s chief spokesman on the matter. The threshold of $1 million in annual sales outlined in the bill is too low, Bieron said, arguing that a better way to gauge a business’ size is how many employees it has.
He suggested setting 50 employees as the level between small and big businesses or using a combination of the employee numbers and a dollar threshold.
“Our main point is that it is good public policy to encourage small business to grow into big businesses before new tax burdens are put on them,” Bieron said.
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