Tapping into online: states have a $23 billion sales tax loophole and Congress is considering a bill to close it.

• Author: Kuhl, Jon
• Position: STATE/FEDERAL

With states still struggling from the 2008 financial crisis that ripped through budgets and stunted revenues, an effort to improve the revenue outlook is gaining widespread support.

The Marketplace Fairness Act would allow states to enforce tax laws currently being ignored. It needs the support of Congress, but would cost the federal government nothing.

Backers say the law would generate billions for state budgets--without raising tax rates--to help build roads, improve schools, support small businesses and fight crime.

"This is a chance for the federal government to really help out the states," says Illinois Senator Pamela Althoff (R). "And it's not chump change. We're talking billions of dollars in extra revenue. During good times we may have been able to get by without the revenue, but the recession has changed everything, and states can no longer afford to forgo any sources of revenue."

In 2008, states lost an estimated $18 billion in uncollected taxes from out-of-state sales, $7.7 billion of which were from online sales. That figure is expected to climb to $23 billion this year, with almost half of that coming from Internet transactions.

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Opponents argue the Marketplace Fairness Act is merely a tax hike in disguise and will hit consumers with taxes that, while already owed, are often not collected. Others who oppose the law come from states without sales taxes who feel it will unfairly burden local companies who do business on the Internet.

What the Act Would Do

The bill will allow states to enforce tax laws currently being circumvented. When a company does business with customers

in states where it has no physical presence, the customers' states have the right to impose sales and use taxes on those transactions.

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But, as the Supreme Court ruled in two landmark decisions, the states do not have the authority under the Constitution to compel out-of-state merchants to collect the taxes.

This is where Congress comes in: If Congress explicitly grants states the authority to enforce their current tax laws, the loophole would be closed.

This tax-enforcement problem dates back to a 1967 Supreme Court case, National Bellas Hess v. Illinois, in which a mail-order company located in Missouri mailed flyers and catalogs to customers in various states, including Illinois. After clashing with the Illinois Department of Revenue over sales taxes, the catalog company took the state to court. The Illinois...