Last year, Congress began the debate on whether or not it should implement a federal Internet sales tax. After passing the Senate, it has stalled in the House where Speaker John Boehner has publicly said he wouldn’t support it. Now the fight is moving to individual states and it gives us insight into the challenges facing Congress.

The AP reports that Hawaii is the latest state attempting to pass an Internet sales tax bill. The bill is already halfway to the finish line as the House of Representatives have already passed it, but now it moves onto the Senate.

Just like the national debate on a universal Internet sales tax, Hawaiian legislators are finding that it’s a series of pros and cons. On one hand, an Internet sales tax mandate would bring in money to fund state projects. On the other, it would be another tax on an already overtaxed population.

Do you think a national sales tax bill is the way to go? Or should it be a state only affair? Let us know in the comments.

Starting with sales tax proponents, they feel that an Internet sales tax is just one way to adapt to a changing world. Hawaii state Rep. Kyle Yamashita says that it’s the government’s “responsibility to adapt as times change, markets change, trends change.” He goes on further to state that the state has to figure out how to “maintain [its] revenues” as the Internet becomes more popular.

Another proponent, Rep. Rida Cabanilla, says that an Internet sales tax would help the state take care of its debt while funding its mandates. She even goes as far to say that it’s an “obligation to future generations.”

As expected, there are plenty of people opposed to an Internet sales tax as well. Rep. Gene Ward notes that Hawaii is in a unique position of having to import food and other essentials. If an Internet sales tax was implemented, those who rely on the Internet to purchase the essentials would face undue burdens.

Another opponent, Rep. Bob McDermott, sums up the average citizen’s views pretty well. He says that he hasn’t “had one person come into [his] office and say, ‘Please, whatever you do this session, tax my online purchase.'”

While the above arguments all come from state legislators, it’s an almost perfect reflection of the current climate in Washington. Taxes are incredibly unpopular and people moved to the Internet to avoid said taxes. Now lawmakers are wanting to close what has always just been a loophole to bring more sales tax revenue in. The only problem is that passage is almost impossible on the federal level so we might just see the fights move to the state level this year.

Hawaii is not the first state to grapple with an Internet sales tax and some others have even already passed bills. New York passed a bill in 2008 that required online retailers to collect sales tax in the state even if they were only tangentially related to an in-state retailer. Amazon found itself running afoul of this law and tried to sue only to have the Supreme Court smack down its lawsuit.

The Amazon case is going to be one of the more prominent problems facing states as they explore Internet sales tax laws. As more online retailers expand, they may find themselves cooperating with a business in another state and find that they have to collect sales tax for that despite not technically having a physical presence in said state. Will states make an exception for them or will they use the Amazon case as basis to go full in on charging an Internet sales tax?

Despite Amazon being the target of many Internet sales tax bills, states will also have to keep the small business in mind. A report from last year found that the federal Internet sales tax bill would exempt small businesses making less than $1 million annually from collecting sales tax. Many groups argue this exemption is too little and would harm many small businesses. When writing bills, state legislators will have to closely examine how the bill would affect the growing number of small businesses in their state and how to best protect them from the expensive task of collecting sales tax from more than 40 states.

On a final note, states might not even have to bother with passing an Internet sales tax bill. It’s pretty obvious the primary target in all of this is Amazon, but the online retailer is already collecting sales tax in over half the U.S. The current federal law states that a retailer must collect sales tax in the state if it has a physical presence in said state. Amazon has used this as leverage to support its building of fulfillment centers in various states across the country. The retailer agrees to bring jobs to the state and pay sales tax in return for other tax cuts and subsidies.

As the Internet sales tax battle moves to the state, legislators would be wise to keep all of this in mind. They might find that it’s best to work with online retailers to bring their business (and jobs) to the state instead of just forcing them to pay online sales tax.

Should states continue where the federal government left off? Or should they work together with online retailers to solve the sales tax problem? Let us know in the comments.

Image via Wikimedia Commons