Bob Bernick, Utah Policy Contributing Editor
The bill, sponsored by Sen. Wayne Harper, R-Taylorsville, a recognized expert on retail remote sales, passed 15-12 with two senators absent. It now goes to the House.
If a bill has severe constitutional problems, by rule the Legislature’s own attorney’s office places what is called a “constitutional note” on the bill.
SB226 has a long one, as do several of the so-called gun rights bills that are moving through the Legislature this session.
In fact, more bills have passed committees and/or one body this year with constitutional notes than in recent memory.
If the bill has constitutional problems, a note is attached to the end of the bill. The SB226 note says, in part: “Because this bill imposes obligations (collect Utah sales tax) on out-of-state sellers who do not have a physical presence (nexus) in Utah, the bill raises issues under the Commerce Clause of the United States Constitution.”
The note goes on: “Because current dormant Commerce Clause case law under Quill (a Supreme Court case) requires physical presence to satisfy "substantial nexus," there is a high probability that if challenged, a court would hold that the factors that establish nexus under this bill fall short of the physical presence required under Quill.”
In short, the new law would likely be struck down.
In explaining his vote for SB226, Senate President Wayne Niederhauser, R-Sandy, said if there was ever a case of the supremacy clause in the U.S. Constitution – which says Congress has the sole authority over such issues – this is it.
Still, said Niederhauser, Congress won’t act on remote sales tax collection. And since SB226 places Utah into a group of 24 other states that are trying to force out-of-state firms to pay state sales tax, hopefully the bill will lead to such collections. Niederhauser cast the deciding 15th “Aye” vote for passage.
Utah-based Overstock.com, an online retailer who currently pays Utah sales tax on its purchases, strongly opposes SB226, in part because it is likely illegal and because it would put Overstock.com at a disadvantage in other states now belonging to the streamline retail sales tax compact.
The Park City firm’s attorneys say Overstock will sue if SB226 becomes law.
Overstock.com is a player in local Utah politics, as well as in national politics.
In the 2012 election cycle, the firm donated $42,750 to local candidates and to the Utah Republican Party. Meanwhile, other Internet retailers who support SB226 have given money to Utah candidates.
Overstock.com is also a sponsor of UtahPolicy.com.
Overstock.com attorney Mark Griffin told UtahPolicy that while some Utah-based Internet retailers were consulted on SB226, Overstock was not.
In any case, Griffin said: “When these bills pass in other states, we lose advertisers, and that puts us at a competitive disadvantage. It also means that Utah Internet advertisers will lose work in a tough economy.”
“We have sued in other states and supported successful constitutional court challenges in other states and Utah will be no different if this bill becomes law.
Griffin added that even though the Legislature's own counsel says SB226 is unconstitutional, “It is nevertheless being packaged as a "message" bill to Congress to get Congress to act. “The only message that Congress will get is that Utah is passing unconstitutional bills.”
Griffin also objects that SB226 was held for some time in the Senate, and passed Wednesday after the House has stopped holding its own standing committees; thus SB226 won’t get a hearing in the House but will move directly to the floor for a vote.
Sen. Todd Weiler, R-Woods Cross, said he voted against the bill because – even though Utahns are supposed to pay sales tax on their out-of-state purchases – imposing such a tax “will be seen by the general public as a tax increase. Look at the positive fiscal note.”
The Legislature’s fiscal analysis says SB226 will bring into the state an extra $550,000 in fiscal 2015; local governments will get $315,000 more.
Not only Utah residents may pay more for their Internet purchases, but Utah businesses may well pay $785,000 more a year through their own Internet sales, as well, the fiscal note says.
Utahns who are buying online merchandise and not paying Utah sales tax now, may have to under the bill, and so will see a tax hike, said Weiler.
Sen. Curt Bramble, R-Provo, said while SB226 is not the final answer, nor a comprehensive answer, to out-of-state internet sales now not being collected, it is a wise and good step forward.
“Utah has been, and Sen. Harper is, a leader” in the effort to get all the retail sales made by Utahns to be taxed. Not only is it a revenue issue, it is a fairness issue.
Said Bramble: How can we expect brick and mortar Utah businesses, who must collect a sales tax, to compete in the world and international market when off-site internet retailers don’t assess the Utah sales tax on purchases made by Utah resident online?
Sen. Evan Vickers, R-Cedar City, an owner of several local pharmacies, declared a conflict of interest because his business competes with online drug retailers.
Vickers said the current system is unfair; he supported SB266. And the Legislature shouldn’t be put off by the threat of a lawsuit. “We shouldn’t be deterred, vote for good policy.”
Bramble reminded senators that current state sales tax law says that anyone buying from an out-of-state retailer is legally responsible to pay sales tax. But one would have to file a special Tax Commission report with a check for the sales tax on all out-of-state purchases – and few if Utahns do that.
“These aren’t new taxes,” said Bramble. “They are (legally) due.”
Sen. Howard Stephenson, R-Draper, head of the Utah Taxpayers Association, said he’s torn by SB226. Officially, the UTA supports the bill. But it is clear that if Utah joins the group of 24 states promising to force their internet-based firms to collect the other states’ sales taxes, that puts Utah-based internet retail firms – like Overstock.com – at a distinct disadvantage in trying to sell products in the states not belonging to the compact.
Utah is drawing a lot of internet-based firms into our state, said Stephenson. And that effort will be harmed by SB226. He voted against it.
“This is (an internet) economic development killer,” said Sen. Stephen Urquhart, R-St. George.
“This bill has not been studied enough. This is not the solution. Internet sales companies won’t come here, that’s a fact,” said Urquhart, who voted no.
Harper, who is the elected head of the interstate streamline sales tax compact group, said that for 12 years state lawmakers have been waiting for Congress to act – and adopt a nationwide solution as the U.S. Supreme Court has told it to.
But they haven’t.
So the individual states have banded together – as they are beginning to do on other issues – to try to solve the problems themselves, he said.
SB226 is one small step toward that effort in the complex problem of Internet retail sales tax collections, he added.
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