The U.S. Senate is expected to vote Tuesday on a bill that could help Ohio recoup some of the estimated $350 million in state and local sales tax revenue it loses each year to online sales.
Under current law, states can only require stores to collect sales tax if the business has a physical presence in that state. As a result, no sales tax is charged on many online sales, giving those retailers a leg up on traditional brick-and-mortar stores.
In many states, including Ohio, shoppers are required to pay the sales tax they weren't charged on such transactions in the form of a use tax when they file their state income tax returns.
"We get roughly $2.5 million to $3 million from about 50,000 taxpayers" in that way, said Gary Gudmundson, communications director for the Ohio Department of Taxation.
That represents about 1 percent of the taxpayers filing returns in the Buckeye State, but there is little that can be done to track individuals' purchases, Gudmundson said. If the state does learn of such a purchase - usually after being notified by another state auditing a business that has sold items to Ohioans - the buyer will generally be sent a letter and given a chance to pay the tax before interest or a penalty is assessed, he said.
U.S. Senate Bill 743 would put the onus on businesses to collect the state and local sales taxes in place where their buyers reside. Supporters say this is only fair; opponents argue it would impose complicated regulations on retailers and doesn't do enough to protect small businesses.
By the numbers
$350 million - estimated tax revenue Ohio isn't collecting each year on online sales.
$226 billion - Internet sales in the U.S. in 2012, up 16 percent from the previous year.
$23 billion - estimated revenue states missed out on collecting for out-of-state sales in 2012, including catalog and other transactions with businesses outside the state.
Source: Ohio Department of Taxation, Associated Press.
The bill does exempt businesses with less than $1 million in annual sales. It also requires states to provide free software to sellers to calculate sales and use taxes to be collected.
The Cook's Shop in Marietta does some business online but is affiliated with a larger website, cooking.com, so the change wouldn't add any difficulty for them, owner Ken Kupsche said. He's in favor of the legislation.
"I think it's a long time coming," he said. "States are losing out on a huge amount of revenue."
Stores can be too if shoppers opt to buy online instead of in person because of the lack of sales tax. The latest issue Kupsche said he and other retailers have to contend with is a practice called "showrooming," in which shoppers look at and even try on merchandise in brick-and-mortar stores, then order it online. There are even apps that allow a user to take a picture of an item's bar code with their smart phone, then purchase it online.
Ways to compete
The Cook's Shop has a few strategies to compete with online retailers, Kupsche said.
"We'll match online prices if they're legitimate - if it's new merchandise, not reconditioned," he said.
Washington County Auditor Bill McFarland said he had no estimate on how much money the county is missing out on from online sales that would be subject to its 1 percent permissive sales tax. Still, if the law was enacted, "the county's revenue should go up, which will enhance their ability to provide services to the residents," he said.
Washington County Commissioner Ron Feathers said he hasn't followed the issue closely but it raises constitutional questions for him, based on the commerce clause in Article I.
"We'll just have to see if it holds up constitutionally," he said.
A 1992 Supreme Court decision established that sales tax can't be collected on out-of-state businesses, but also said Congress could pass a law to do so.
A procedural vote in the Senate last week indicated wide support for the bill, including from Sen. Sherrod Brown, D-Ohio.
"Because of uncollected state and local tax revenue, our state has lost nearly $630 million in revenue," Brown said in an emailed statement Wednesday. "That's funding for first responders, teachers and road repairs that Ohio and local governments are missing out on."
He went on to note support from local and state leaders, Fortune 500 companies and labor organizations.
Sen. Rob Portman, R-Ohio, did not vote on the procedural measure. A spokeswoman for the senator indicated he is still considering how to vote on the bill.
"Sen. Portman believes that our tax system should ensure a level playing field for all businesses," press secretary Caitlin Dunn said via email. "Washington should not create a new tax, but rather ensure that existing taxes are applied evenly.
"At the same time, Sen. Portman will not support policies that excessively burden businesses and consumers. Therefore, he is still examining this bill to determine its effects," she said.
The bill's prospects are less clear in the House. Some anti-tax groups have labeled it a tax increase, although it is supported by a number of Senate Republicans who have pledged not to raise taxes.
Congressman Bill Johnson, R-Ohio, remains undecided on the bill.
"This is becoming an increasingly important issue, and as more and more folks are making a significant number of purchases online, it is getting a lot of attention," the Congressman from Marietta said in an emailed statement. "I certainly encourage residents and business owners in eastern and southeastern Ohio to contact my office to share their views on this matter; any proposed legislation would certainly impact different people in different ways."
The Associated Press contributed.