House Bill 385 would not have required that online retailers would be forced to collect sales tax, as regular brick-and-mortar businesses in the state are. Instead, it simply would have forced online retailers to provide notice to consumers that they need to pay the sales tax on an online purchase. ---At the hearing, it was clear that the bill pitted large online-retail giants like Overstock.com against small, local businesses like Salt Lake City’s King English Bookshop in a dispute over taxes.

Current law states that customers are required to pay sales tax on purchases, but the state requires actual physical businesses to collect that tax. No such requirement has been placed on online retailers yet, though a federal fix has been in the works for years. Rep. Wayne Harper, R-West Jordan, presented his HB 385 that would simply require online retailers to notify Utah customers that they are required to pay a sales tax on the purchase, though a companion bill is expected to come out soon that would actually require online retailers to collect the sales tax.

The committee was split in discussion about how they viewed the bill, and not necessarily along party lines. Rep. Jim Nielson, R-Bountiful, said that if the notice forced businesses to collect a tax that previously had not been collected, than he would view it as a “stealth tax increase.”

Rep. Steve Eliason, R-Sandy, disagreed with that argument. “If that’s a tax increase, then any tax cheat that’s not paying taxes would proclaim they are having their taxes being raised when enforcement is in place,” Eliason said.

Jonathan Johnson, President of Overstock.com, who says that his online retailer  employs 1,300 plus Utahns in the state, challenged the bill by pointing out a 2010 lawsuit in Colorado over similar legislation there (although that legislation went further than Harper’s by requiring retailers who didn’t disclose the need to pay sales tax to have to turn over customer information to a state agency).

Johnson also argued that Utah does not want to go down that road by creating its own solution when a legislative fix may be coming out of Washington, D.C. Ultimately, he argued that a compromise solution for online businesses including many startups needs to incorporate some kind of software that will help online retailers be able to know the different sales taxes that might affect transactions. He noted there are more than 10,000 different taxing districts in the U.S. alone across state, county and city levels.

“[The bill] does not give a uniform solution,” Johnson said. “It leads to the creation of a patchwork solution that will grow across 50 states.”

Besty Burton, owner of the King’s English Bookshop in the 15th and 15th neighborhood of Salt Lake City, argued that that preference to online retailers puts local businesses like hers at 10 percent disadvantage over time. She arrived at that number by calculating 3 percent as the costs to business of collecting the tax from customers, as they are required to do so by law, and added it to a roughly 7 percent current sales tax.

“This is really a sleight-of-hand inequality,” Burton told the committee. “Everybody who sells in the retail market should collect the same tax—it’s just a fairness issue.” Burton also added that local small businesses don’t just bring value to the local economy but to communities, as well.

“We really add in aggregate to our economy, but beyond that, we serve on boards, our kids are in Girl Scouts -- we are out in the community,” Burton said. “We are, in a real sense, the glue that holds our communities together.”

Even with the bill just as a notice to in-state customers, the panel defeated the bill by a vote of 10-5.

If you would like to find your legislator to contact them about this bill, click here. If you would like to contact Rep. Wayne Harper about House Bill 385 or his other bill that would require online retailers to collect the sales tax in the state, click here. For more updates from the 2012 Legislature, follow @EricSPeterson on Twitter.