Lawmakers, looking to help cash-strapped local governments, are coalescing around legislation aimed at letting states require most online retailers and catalog-only companies to collect sales taxes from customers.
The momentum is building nearly two decades after the U.S. Supreme Court barred states from requiring out-of-state companies to collect in-state taxes on sales. But the court left the door open for Congress to allow such collection through legislation.
The new effort is being boosted by a major crack in the nearly solid wall of opposition by Internet retailers. Amazon.com Inc., the world’s largest online retailer, wants standardized federal rules in the face of new online sales tax collection laws in California and a growing number of other states.
“If I were president of an online retailer … I would look at this week in Washington, D.C., and I’d make my plans to start collecting sales taxes wherever I sold things in the United States,” said Sen. Lamar Alexander (R-Tenn.).
On Wednesday, Alexander was part of a bipartisan group of senators — five Democrats and five Republicans — who introduced legislation aimed at leveling the playing field among online, catalog and bricks-and-mortar retailers.
The bill, called the Marketplace Fairness Act, also would enable state and local governments to collect an estimated $23 billion in tax revenue each year for online, catalog and other so-called remote sales.
“It’s about closing a tax loophole,” Alexander said.
Alexander, a former Tennessee governor, has been trying for years to overturn the court decision legislatively. He predicted that the bill would pass Congress because it is a bipartisan endeavor and is more flexible than previous efforts. The bill is similar to legislation introduced last month in the House.
The severe economic problems of many state and local governments add to the impetus to pass the legislation, which would boost revenue without creating a new tax, said Neal Osten, director of the Washington office of the National Conference of State Legislatures.
“We believe at some point Congress will say … ‘This is something we can do for the states that does not cost the federal Treasury a dime,’” said Osten, whose group has supported similar measures for years. “I think in the end, that is going to be the winning argument for Congress.”
A 1992 Supreme Court ruling prohibits states from collecting sales taxes from retailers unless they have a physical presence in the state. The ruling has exempted most online sales, and the majority in Congress for years has allowed the no-tax rule to remain partly to foster the growth of the Internet.
But as online retailing has grown over the last decade, states have been trying to solve the problem on their own by expanding the definition of physical presence to include third-party affiliates, typically in-state websites that earn commissions by providing links to Amazon and other out-of-state retailers.
For the third quarter, sales by online retailers in the U.S. grew 13% to $36.3 billion from the same quarter last year, Internet data firm ComScore Inc. said Wednesday. It was the eighth straight quarter of year-over-year growth.
Nearly four months ago, California enacted a law requiring most online retailers with affiliates in the state to collect sales tax from purchases made by state residents. Amazon, which has fought such efforts in other states, then threatened to launch a referendum battle.
But in September, Amazon agreed to begin collecting the taxes starting in September 2012. On Wednesday, Amazon said it “strongly supported” the Senate bill, giving the measure’s prospects a major boost.
“I think it’s telling they’ve stepped forward and said, ‘Here’s a solution that can work,’” said Sen. Richard J. Durbin (D-Ill.), who joined Alexander and Sen. Michael B. Enzi (R-Wyo.) in announcing the legislation.
Amazon’s support should silence critics who contend the legislation would stifle the growth of online commerce, he said.
But some high-tech groups and large online retailers, including EBay Inc. and Overstock.com, said they opposed the legislation.
“It will leave a lot of very small retailers with a new burden to make it harder for them to compete,” said Brian Bieron, EBay’s senior director of federal government relations and global public policy.
The legislation would give states the authority to enact laws requiring retailers to collect sales tax for remote purchases as long as they adopted measures to make it easier for businesses to pay the taxes.
Retailers have argued for years that it would be too complicated to collect state and local sales taxes because of differing definitions and the difficulty of submitting payments to thousands of jurisdictions.
The Senate bill would require states that want to require the collection of those sales taxes to join an existing 24-state group called the Streamlined Sales and Use Tax Agreement that has standardized definitions and provided a single location in each state to send all payments.
States such as California, whose tax systems might be too complicated to join the group, still could be allowed to require retailers to collect taxes if they adopted similar tax simplification measures.
Retailers that take in less than $500,000 in total remote sales each year would be exempt.
The bill has drawn support from some conservative groups, including the American Conservative Union, because it leaves it up to each state to decide whether it wants to collect the sales tax.
But EBay’s Bieron contended that the small-business exemption is too low. The House bill has a $1-million sales exemption. And the California law exempts companies that do less than $1 million in annual sales in the state alone.
Bieron said EBay would like to see any federal law use the Small Business Administration’s definitions of a small business, which range from $7 million to $30 million in annual sales, depending on the industry.
Sen. Enzi said the $500,000 exemption would allow a small business to get a good start before it could be required to collect online sales taxes. But he and Durbin said they would move to the House bill’s $1-million exemption if there was consensus for that in the Senate.
Still, some lawmakers have been adamant about not allowing states to require online retailers to collect sales taxes.
A bipartisan group of six senators last week introduced a resolution to reaffirm that Congress should not give states the authority to “impose any new, burdensome or unfair tax collecting requirements on small Internet businesses and entrepreneurs.”
A bipartisan group of 35 House members supports a similar measure there.