E-fairness proponents hope 2013 Marketplace Fairness Act will collect billions in unpaid online taxes

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The Marketplace Fairness Act before Congress aims to enable states to collect more than $23 billion in unpaid sales tax on online purchases.

(Ted Crow, The Plain Dealer)

CLEVELAND, Ohio -- David Lewis, owner of Lewis Electronics in Shaker Heights, is fed up with customers who ask why he charges sales tax on items they can buy tax-free over the Internet. Some will even show him on their smart phones how much cheaper the price is online.

"As a brick-and-mortar retailer, I can get a [sale] because I provide better customer service than I need to," he said. "But I don't have a choice of paying that tax and I can't afford to eat it."

Lewis is among millions of retailers nationwide who are pinning their hopes on the latest version of the Marketplace Fairness Act introduced on Feb. 14, which would tax online sales at the same rates those items are taxed in stores.

The proposed federal law aims to close the loophole that lets online sellers like Amazon.com avoid charging sales tax in states like Ohio where they don't have any physical stores or warehouses.

Consumers find "tax-free" sites like Amazon more attractive than bricks-and-mortar retail sites. 

Although people who shop at such sites are supposed to keep track of their purchases and pay the sales tax owed with their income taxes, less than 1 percent actually do.

"Don't put a sales tax on anybody or put a sales tax on everybody," said Lewis, whose 26-year-old business is facing a 30-percent drop in sales this year from Internet competitors.

That's on top of the 15 percent drop he saw in his 2012 sales.

He appreciates the customers who value his expertise and buy their stereo systems and custom leather interiors from him, but wonders "why should they be punished for supporting me?"

Jack Tompkins, the second-generation owner of Mentor TV and MentorTV.com, said he can't understand why the tax laws still favor out-of-state sellers who don't contribute anything to the local community.

"We've got a beautiful showroom loaded with electronics," he said. "We collect the taxes from the consumer and we present that to Ohio.

"We're paying our taxes here in the city. We employ people who work here and buy here. We do our part, so why can't they?"

When customers come in for audio systems or home entertainment centers, he said, he's at a huge disadvantage because of the 6.75-percent Lake County tax rate.

"Price-wise, we can compete, but how can you compete with 'no-tax'? You can't."

Enough votes to pass:

Proponents of the e-fairness bill, including Ohio co-sponsor Rep. Steve Stivers, Columbus Republican, are optimistic that it will pass this time because it has broader bipartisan support in both the House and Senate. Earlier versions never made it to the floor for a vote.

"The Marketplace Fairness Act is about jobs and fairness," Stivers said.

"The way we collect our sales tax today discriminates against businesses that have jobs and investments in our local communities, and it favors companies that primarily operate over the Internet."

Ohioans click on Amazon more than bricks-and-mortar store sites like Walmart or Toys 'R Us.

Supporters also believe consumer sentiment is more sympathetic to brick-and-mortar retailers hurt by competition from Internet sellers.

A recent survey by the International Council of Shopping Centers found that 59 percent of consumers support requiring online retailers to collect sales tax when people buy online, and 82 percent support federal legislation that dictates that consumers who buy online should pay the same sales tax as those who buy in-store.

Shoppers have also said that they'd prefer paying sales tax at the point of purchase rather than having to keep track of what they bought and report the extra taxes on their income taxes.

Senate Majority Leader Harry Reid said on Feb. 20 that "we have more than enough [votes] to pass it [the bill]."

Proponents of the "e-fairness" bill, a coalition representing nearly 3 million retailers, companies and business groups, including the International Council of Shopping Centers, the Retail Industry Leaders Association, the National Retail Federation, and the Ohio Council of Retail Merchants, as well as Ohio-based DDR Corp., Jo-Ann Stores, Limited Brands, The Kroger Co., and Wendy's International Inc.

"For nearly two decades, Congress has undermined the viability of local brick-and-mortar businesses by conferring a major competitive advantage on their large online rivals," said Stacy Mitchell, senior researcher with the nonprofit Institute for Local Self-Reliance and author of "Big-Box Swindle."

"Exempting internet retailers like Amazon from having to collect sales taxes effectively gives these companies a 4 to 12 percent price advantage over local stores.

"Amazon now captures more than one-third of online shopping and ranks as one of the top ten retailers in the country. It hardly warrants special favors."

Christine Bender, owner of Belpre Motor Sales, an auto accessory shop in Belpre, Ohio, said: "We're not asking for a new tax. We're asking that every retailer be on the same set of rules."

In Ohio, the estimated $628.6 million in unpaid online taxes is money that could have helped local municipalities pay paramedics and build roads, according to the National Conference of State Legislatures.

Nationwide, NACL said states could have collected more than $23.3 billion in sales tax revenue from online sellers in 2012.

7,600 taxing districts:

The way it works now, a 1992 Supreme Court ruling exempts Internet retailers from having to charge and remit sales tax in states where they don't have a physical presence.

The decision, Quill Corp. v. North Dakota, was handed down in response to the difficulty of complying with the tax codes in 45 states and 7,600 local taxing districts - long before retail went online.

Twenty-five states (but not Ohio) have simplified their tax codes and designated a single collection site in anticipation of a federal law to collect taxes on online purchases.

Bender of Belpre Motor Sales said the online software that calculates shipping costs can just as easily compute local tax rates.

Amazon.com, the world's largest online store, charges sales tax in seven states but has cut deals in others to postpone collecting taxes, sometimes as part of incentives to build warehouses there. Amazon says it would prefer a federal law that applies to everyone rather than having to comply with different rules in every state.

Ebay Inc., however, opposes the current Marketplace Fairness proposal, saying that any Internet sales tax "throws a new tax barrier in front of small businesses," said Tod Cohen, vice president and deputy general counsel of global government relations, in a statement.

The latest version of the Marketplace Fairness Act includes an exemption for online sellers who made less than $1 million in the previous calendar year, but eBay thinks that's still too low.

"That's not close to anybody's definition of a small business," said Brian Bieron, eBay's senior director of public policy.

He said eBay fully supported a previous version of the Marketplace Fairness Act that exempted small businesses according to higher Small Business Administration thresholds. The current version is "bad for competition and bad for job creation."

And mom-and-pop businesses aren't the only ones feeling the pinch from online stores.

Best Buy Co. recently closed 15 stores in Canada and cut 400 jobs from its corporate headquarters in Richfield, Minn.

The world's largest electronics retailer also started offering a price-match guarantee and free shipping from its bestbuy.com website - all in an effort to reverse the damage from shoppers who use its massive stores to check out big-ticket items they ultimately buy online.

Target Corp. now promises to price-match whatever its online competitors are selling, including Amazon.com, Walmart.com, BestBuy.com, ToysRUs.com and BabiesRUs.com, also in an effort to prevent shoppers from buying its items elsewhere.

But what will shoppers think?

If the Marketplace Fairness Act passes, it will likely dampen some of the enthusiasm for buying online.

"Eighteen percent of consumers say they'd be less likely to buy online if they had to pay sales tax," said Britt Beemer, consumer behavior consultant and chairman and chief executive of America's Research Group Ltd. in Summerville, S.C.

He said the online sales tax movement is really an effort by states to gain more revenue that will ultimately make consumers unhappy. Many shoppers say the biggest reason they like online retailers is because they can shop from home whenever they'd like.

Joe Gramc, vice president of finance for Five Star Trucking Inc. in Willoughly, estimates that 70 percent of what he buys other than clothing or groceries he orders from Amazon.com.

With free two-day shipping for Amazon Prime members like himself, "the stuff just shows up at your door," he said. "It's way easier than going to a store."

But Gramc likes the idea of leveling the playing field for local small businesses and not having separate rules for Ohio and out-of-state businesses.

Charging taxes when people buy things online rather than trusting them to pay up later "really makes the consumer's life a little easier because they're responsible for paying it anyway," he said.

School psychologist Julie Andolina prefers shopping online and having her purchases delivered to her door than trying to buy books, toys and shoes with two small children, ages 2 and 3, in tow.

She uses Amazon Price Check and other smart phone apps to scan barcodes to make sure she's getting the lowest price before buying.

"There's a huge convenience factor. I don't factor in tax as much as I factor in shipping," she said.

When Allison Peltz, social strategist at Rosetta, fancies a new pair of shoes, she orders up to a dozen pairs at a time from Zappos.com or Piperlime.com. Then she tries them all on at home, picks out the one or two pairs she likes best and returns the rest via the company's free shipping.

"I don't typically go in stores to look at something," she said. "I buy it based on ease to get it to me."

She used to work at Best Buy, and said being able to browse several websites and read the online reviews are just as valuable as seeing and trying out items in person.

But shopping online is "a million times easier because you can read everybody's reviews of how comfortable" the shoes are before buying them.

Peltz said the last time she went inside a shoe store, she couldn't believe how much time was wasted browsing the racks and looking for something to buy.

"I kept thinking: 'This could've been so much easier online,' " she said.

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