Utah onlines sales tax bill advances despite warning it probably will be struck down in court

Carol Elliott, owner of the Paletti clothing store, says it happens all the time. Employees spend perhaps hours helping customers to find the perfect dress. Then they buy online instead to avoid sales tax.

"They say, 'Well, I just saved 7 percent. I'm not going to buy it from you when I have to pay 7 percent more on this $500 dress,'" she told legislators Tuesday. Elliott says such customer activity could drive her out of business. "We will close if things don't get better."

A bill to force most online retailers to collect Utah sales tax was endorsed on a 7-0 vote Tuesday by the Senate Revenue and Taxation Committee, sending SB110 to the full Senate for consideration.

Despite the unanimous vote, the bill faces significant opposition from big online retailers including eBay and Overstock.com, and from anti-tax-hike groups. They argue it is unconstitutional, and will bring expensive lawsuits.

The Office of Legislative Research and General Counsel agrees, and put a constitutional note on the bill saying it has a "high probability" of being rejected by courts.

But its sponsor, Sen. Curt Bramble, R-Provo, says those opinions are based on a still-standing 1992 U.S. Supreme Court decision and much has changed about the ability to collect internet sales. He believes it will be overturned.

By law, internet retailers are required to collect sales tax for online sales only if they have a physical presence in the state, such as a store or distribution center.

Otherwise, buyers in Utah are required by state law to pay the sales tax themselves by adding it to their annual income tax return. Few do.

Legislative analysts figure the state loses $220 million a year in due-but-uncollected online sales tax.

Bramble's bill would create an "economic presence" in Utah for any online retailer that sells more than $100,000 in merchandise here a year, and force them to automatically collect sales tax at the time of purchase.

It has a back-up plan in case that is found to be unconstitutional.

In that case, it uses an alternative plan saying any firm that has links to a Utah business — such as companies that advertise on the websites of "mommy bloggers" here — would also need to collect tax. Bramble said that system has been upheld so far by courts.

"We're adopting a bill that is unconstitutional," warned Gary Thorup, representing eBay. That firm already collects sales tax in Utah because it has physical operations here. But Thorup says the company wants Congress to pass a national solution, and said the Utah bill won't help that and will only waste money in court battles.

Similarly, Mark Griffin representing Overstock.com, said, "This is not the way," and also argued that the state should wait for a federal solution. Bramble argued that states passing such bill is the best way to prod federal action.

Evelyn Everton, Utah director of Americans for Prosperity, said the bill, if enacted, will surely bring lawsuits — and amounts to representation without taxation for out-of-state firms — so it should not pass.

"Maybe it raises $50 million. Is that worth it?" asked Dave Davis, president of the Utah Retail Merchants Association. "I would suggest it's good public policy to go after that," and adds it creates a level playing field for local bricks-and-mortar stores.

Everton contended the bill could also put 10,000 mommy bloggers out of business in Utah, with online retailers likely dropping them to avoid collecting tax in the state.

But Sen. Wayne Harper, R-Taylorsville, said not passing the bill could put major retailers out of business — and already has — endangering far more jobs that pay much higher salaries.

"It's going to cost a lot more jobs if we fail to act," he said. Harper has two other online tax bills that use other schemes to force collection by internet retailers, but said he is backing Bramble's bill first — and will use the others as backups.

The bill has extra support this year as a way to possibly raise extra money for education, perhaps instead of a ballot initiative being pushed by Our Schools Now to raise income tax by $750 million a year for schools. Gov. Gary Herbert said it makes more sense to collect taxes already owed but not collected than to raise taxes.

 

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