Online sales tax bill passes in the Senate

Sen. Jake Files

Arkansas is one step closer to casting a wider net when it comes to collecting sales tax. A bill aimed at raising state revenue through the collection of sales and use tax on online purchases passed 23-9 in the Senate Monday.

“Nobody wants to pay more taxes, by any stretch,” said Sen. Jake Files (R-Fort Smith), lead sponsor of Senate Bill 140, which would require out-of-state sellers who do a certain amount of online business in Arkansas to collect sales and use tax.

“But in a fairness situation to our local businesses that are investing in our community -- they’re putting people to work, they’re paying property tax -- this is the right thing to do because it puts them on an equal playing field with the companies that deal out of state,” Files said.

Files' bill would go against court precedent. A 1992 Supreme Court ruling prevents states from forcing out-of-state sellers without a physical presence to collect tax. Now that web-based retail is an integral part of the economy, many people believe the ruling is ripe for a challenge.

Files’ bill would require online sellers that gross more than $100,000 or process at least 200 separate transactions to collect sales tax. The bill is based on legislation adopted in South Dakota, where online retailers sued after the law went into effect; their suit is pending. Amazon began collecting sales tax on purchases made in South Dakota after the law was passed.

“I think the reason that Amazon is voluntarily collecting the tax in these states is because they see the writing on the wall,” Files said. “If they felt like this was going to be challenged and defeated, I don't think you'd see them volunteering [to collect sales tax] all over the country.

But some people see the collection of sales tax online as a new tax.

“So this is a tax increase?” Sen. Linda Collins-Smith (R-Pocahontas) asked Files on the Senate floor. “The taxes that are not being charged right now because they’ve never been charged … is now going to be charged?”

Files said he has received texts and emails from constituents with similar concerns.

“People are just misinformed,” Files said. “The tax is on the books now, the fact that nobody is paying it ... doesn't mean that it's not a tax and it's not due.

Technically, Arkansas taxpayers are supposed to declare and remit use tax for items they buy online, but few do. The requirement is based on a 1949 law that was passed to deal with catalog sales. Out-of-state merchants who sold goods through catalogs were not required to collect sales tax if they didn’t have a physical nexus, so the state required Arkansans to pay a “compensating use tax,” according to Joel DiPippa, a lawyer with the Department of Finance and Administration.

DiPippa said SB 140 does not propose a new tax. “It’s a change in the enforcement and collection methodology,” DiPippa said.

The revenue impact of the bill is unknown, according to the Department of Finance and Administration. DiPippa says there is no record of what taxpayers are buying on the internet.

“We are unable to even estimate how much revenue this would bring in because we don’t know what isn’t taxed,” he said.

House Bill 1388, filed by Rep. Dan Douglas (R-Bentonville) and co-sponsored by Files, approaches the collection of sales tax on online purchases from a different direction. It would require out-of-state online retailers who do not already collect sales and use tax in the state to warn Arkansas customers that a sales or use tax was due. Online retailers would also have to send the customer an annual statement detailing the online purchases and taxes owed and would have to send an annual report of sales for each customer to the Arkansas Department of Finance and Administration.

Files says he thinks the Senate bill is better.

“[The House bill] was filed in the case that this was deemed unconstitutional, we’d have a backup plan that was constitutional," he said.

The House bill is modeled after a Colorado law that was upheld by the 10th U.S. Circuit Court of Appeals. The U.S. Supreme Court refused to hear the case, allowing the appellate court’s decision to stand.

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