WASHINGTON — The Senate gave strong bipartisan approval to landmark legislation that could largely lead to the end of the nation’s decades-long Internet sales tax holiday.
Now the issue shifts to the more skeptical, Republican-controlled House, where the debate will revolve around one fundamental question: Does helping governments collect an existing and owed tax constitute a tax increase?
The Marketplace Fairness Act, approved 69-27 Monday by the Senate, gives states the authority to require larger online retailers with no physical presence in those states to collect sales taxes that residents already are obligated to pay.
Many states, including California, are expected to jump at the chance to start collecting an estimated $23 billion in total sales tax revenue that is lost to online, catalog and other so-called remote sales each year.
But because most consumers have been dodging those taxes for years — only about 1% make the required payments to their state — the result would be that they would pay more in taxes.
For that reason, some conservative anti-tax activists such as Grover Norquist, whose Americans for Tax Reform asks lawmakers to sign a no-new-tax pledge, are pushing House members to reject it.
“If this bill passes, Americans will pay more in taxes than if it doesn’t pass,” Norquist said. “It will result in a tax increase.”
Norquist is an influential voice among Republicans, most of whom have signed his pledge.
But some Republicans are pushing back on his interpretation. They said the legislation raises no new taxes and just helps level the playing field between online and traditional bricks-and-mortar retailers.
“There are people on my side of the aisle admittedly who are not going to be favorable to anything that may even hint of a tax increase,” said Steve Womack (R-Ark.), the lead House sponsor.
“And that’s regretful,” he said, “because we are presiding over the destruction of the traditional retailer that has been the backbone of American business for a long, long time.”
So far, House leaders have not committed to taking up the legislation, saying it would first go to the House Judiciary Committee. Rep. Bob Goodlatte (R-Va.), the committee’s chairman, said he sympathized with the plight of traditional retailers.
But like some other House Republicans, Goodlatte has expressed concerns that the bill would force retailers to calculate hundreds of tax rates for customers around the country and could open the door for states to impose other taxes, such as income or business taxes, beyond their borders.
“The issue of an online sales tax is extremely complex,” Goodlatte said. Dealing with those complexities through hearings could slow the bill’s momentum.
The legislation, which conventional retailers such as Wal-Mart Stores Inc. and their supporters have been pushing for years, would override a 1992 Supreme Court decision that prevented states from collecting sales taxes from companies with no physical in-state presence.
With e-commerce increasing and local governments hurting for cash, California and other states have stepped up efforts to collect sales taxes for online purchases by their residents.
In 2011, California enacted a law expanding the definition of an in-state presence so it could begin collecting sales tax from some large online retailers, notably Amazon.com Inc. Amazon initially fought such efforts, but then agreed to start collecting sales taxes and now supports the legislation.
EBay Inc. has remained strongly opposed, and its chief executive, John Donahoe, has been trying to rally the company’s 40 million users to urge their representatives to oppose it unless there are major changes.
The Senate bill would allow states to expand their sales tax collection to companies with no in-state presence, unless they have less than $1 million annually in out-of-state online and other remote sales.
“It’s closing a loophole we created at a time when the Internet was an embryo,” said Rep. Jackie Speier (D-Hillsborough), one of the leading House Democratic supporters. “The Internet is now a young adult.... It’s time to level the playing field.”
Sen. Dick Durbin (D-Ill.), a chief Senate sponsor, said the legislation would help struggling state and local governments and would exempt 99% of small businesses.
“This bill will affect the big boys, the Internet retailers like Amazon, like EBay,” he said Monday in urging his colleagues to pass the bill. “It does not affect the small Internet retailers.”
EBay disagreed. The company wants the exemption for small businesses increased to those with up to $10 million in annual sales or to those with fewer than 50 employees to avoid hurting the growth of small businesses on the Internet.
“The biggest threat for small businesses, both small online retailers and small independent stores, continues to be the competition they face from the retail behemoths like Amazon and the big-box stores,” Donahoe wrote Monday in a post on LinkedIn.
“Multibillion-dollar retailers are lobbying for this bill because it puts new burdens on their small online retail competitors,” he said.
Anti-tax advocates said the problems with the bill go beyond the small-business exemption.
They believe it unfairly allows most states to impose their tax laws on businesses in other states. Only four states — Delaware, Montana, New Hampshire and Oregon — have no state or local sales taxes. A fifth state, Alaska, has no state sales tax but allows local sales taxes.
“This is regulation without representation,” said Curtis Dubay, senior tax policy analyst at the conservative Heritage Foundation.