Online sales tax bill poised to pass

With rare bipartisan support, the Senate is poised to pass a bill this week that could lead largely to the end of the nation’s long online sales tax holiday.

The measure would allow states to require that large online retailers collect sales taxes on goods sold over the Internet, closing a loophole that has benefited the likes of EBay Inc. and Inc.

The White House gave the legislation its approval Monday, and it passed a key procedural hurdle. The Senate voted 74 to 20 to begin consideration of the so-called Marketplace Fairness Act, with a final vote expected in a few days.

“I don’t think it’s a matter of if, but a matter of when” the legislation passes Congress, said Rachelle Bernstein, vice president and tax counsel for the National Retail Federation.


The measure would give a more sound legal foundation to California and other states with laws mandating the collection of online sales taxes, and it would allow them to expand the requirement to more Internet retailers.

But as momentum builds after years of failed attempts to get around a 21-year-old Supreme Court decision that carved out the loophole, opponents began a new push to derail the legislation.

EBay Chief Executive John Donahoe began sending emails to 40 million of the company’s users warning that the bill would raise costs for small online sellers. He urged them to push their lawmakers to oppose it unless changes are made.

The financial services industry surprisingly jumped into the fray as well, with two large industry groups complaining that the proposed legislation could open the door to state taxes on Internet stock transactions.

The Financial Services Roundtable, which represents large banks, and the Securities Industry and Financial Markets Assn., which comprises securities firms, banks and asset managers, called on Congress to hold hearings exploring the potential ramifications.

“If it’s easy for the states to start taxing footwear [bought online], then why can’t they tax financial products?” said Scott Talbott, chief lobbyist for the Financial Services Roundtable.

Talbott acknowledged the bill does nothing specifically to make it easier for states to enact stock transaction taxes. But he argued: “In this age when everyone’s looking for revenue, it creates the impetus for imposing a financial transaction tax.”

A bipartisan group of seven senators, including several from states with no sales tax, wrote to Senate Majority Leader Harry Reid (D-Nev.) urging him to slow down the bill because it “will result in crippling compliance costs on small Internet businesses.”


Senators from states that do not have sales tax, such as New Hampshire, Texas and Montana, have argued that the legislation is unfair to online retailers based in their states because those companies would have to collect taxes for other states.

“It really should be renamed the Internet Tax Collection Act because it is going to make online businesses the tax collectors for the nation,” said Sen. Kelly Ayotte (R-N.H.).

But supporters said they hoped to push the bill through the Senate and then begin working on clearing the House. There is bipartisan support there, with a companion bill from Rep. Steve Womack (R-Ark.), co-sponsored by 22 Republicans and 33 Democrats.

But the fiscally conservative Americans for Tax Reform, which has great influence over many Republicans, has called the bill a tax increase.


Backers of the proposed legislation denied that label.

“The bill we have before us will not create any new tax. It creates a method for compliance or collection of an existing tax,” said Sen. Richard Durbin (D-Ill.). “It is only fair to the businesses across America ... if they’re required to collect sales taxes on their sales that those who are competing with them do the same.”

When sales taxes are owed but not collected, buyers are supposed to keep track of their online purchases and pay the taxes to their states, but few do.

Bricks-and-mortar retailers and local government officials have been pushing since the late 1990s to end what they call preferential treatment for companies that sell goods solely over the Internet.


The loophole allows online retailers to attract shoppers with lower prices, and it costs local governments billions of dollars annually in lost tax revenue. As Internet shopping has grown in popularity and the nation’s economic problems have strained state and local budgets, the effort to close the loophole has gained momentum.

The National Council of State Legislatures, which supports the bill, estimated states lost $23 billion in sales tax revenue last year, about half from Internet sales and half from other out-of-state sales, such as from catalogs and some business-to-business transactions. Those forms of so-called remote sales would be covered under the proposed legislation.

The bill allows states to require out-of-state retailers to collect taxes on goods sold to in-state residents.

A state would have to provide retailers with free software to help them calculate the sales tax owed by state residents based on their ZIP Code. Businesses with less than $1 million in annual out-of-state sales would be exempted from collecting sales tax.


The effort to remove the loophole got a boost in 2011 when dropped its longtime opposition to the legislation and struck a deal with California, and later other states, agreeing to begin collecting sales tax.

But many online retailers, led by EBay, still oppose the federal legislation.

“The threat of Congress passing a bad Internet sales tax bill is real,” Donahoe wrote in emails sent to EBay users Monday.

EBay wants the small-business exemption expanded to companies with less than $10 million in annual out-of-state sales or fewer than 50 employees. Brian Bieron, senior director of global public policy for EBay, said the $1-million exemption is too low to cover many small businesses.


“It’s a bill that right now would penalize small businesses that use the Internet for retail,” he said.

But White House Press Secretary Jay Carney said the Obama administration supports the bill after analyzing it and hearing “overwhelmingly from governors, mayors and the business community on the need for federal legislation to level the playing field.”