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Senate Passes Internet Tax Bill

The legislation, known as the “Marketplace Fairness Act,” seeks to close what many advocates say is a sales tax loophole benefiting online sellers such as eBay.

WASHINGTON — With the Senate passing legislation with a vote of 69 to 27 Monday that would give states the authority to collect sales taxes from out-of-state online sellers, retail groups in favor of it turned their sights to the House, where hurdles exist.

The legislation, known as the “Marketplace Fairness Act,” seeks to close what many advocates say is a sales tax loophole benefiting online sellers such as eBay. Under current law, state governments can only require retailers that have a physical presence in the state to collect sales taxes. That gives online sellers that don’t have a distribution center or office in a certain state a price advantage, according to proponents of the bill.

The legislation would eliminate the sales tax differential and put brick-and-mortar retailers back on the same footing.

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A bicameral, bipartisan group of lawmakers introduced legislation in February giving states the authority and option to collect sales taxes from out-of-state businesses in the 45 states and District of Columbia that collect sales taxes, regardless of whether they have a physical presence in the state. The legislation provides for a small-seller exemption that prohibits states from requiring remote sellers with less than $1 million in annual nationwide remote sales to collect sales and use taxes. State governments would also be required to provide free software to online sellers to help calculate sales taxes and lessen the burden.

While the bill passed with significant bipartisan support in the Senate, its prospects in the House remain uncertain. Some House Republicans have said they oppose the bill, arguing it will impose new taxes on online businesses. Republican leadership in the House has been wary of moving bills that have the appearance of a tax increase.

The bill also faces opposition from eBay, which is reaching out to millions of its users urging opposition to the legislation. The Web giant argues that the bill would impose an unfair tax burden on small businesses that use its online platform and is lobbying for an exemption on sales tax collection for online businesses with less than 50 employees or less than $10 million annually in out-of-state sales.

However, Amazon.com Inc. supports the legislation, along with a broad swath of the retail community, which has put eBay in the position of fighting the battle with little help.

Bill Hughes, senior vice president for government relations at the Retail Industry Leaders Association, said conservative groups are split on the legislation, but noted that the bill in the House already has growing support from Republicans.

“First of all, we have [65] cosponsors in the House on the bill and that includes 24 Republicans,” said Hughes. “We think there is a lot of possibility for growing the vote in the House and we are confident it will be successful.”

Hughes said RILA has held conversations with House Republican leadership and remains “very confident they understand this is not a new tax. It is a collection issue.”

“The retail industry — the largest private sector employer — is rapidly changing and evolving,” said Stephen I. Sadove chairman and chief executive officer of Saks Inc., and chairman of the National Retail Federation. “Retailers compete for customers on many different levels, distribution channels and fronts, including service and selection, but they cannot compete on sales tax. Congress needs to address this sales tax disparity and allow retailers to compete freely and fairly. Retailers of all shapes, sizes and channels deserve a level playing field.”

“It is a question of rhetoric versus reality. Rhetorically, it can be described as a tax increase but the reality is it is not a tax increase,” said David French, senior vice president for government relations at the National Retail Federation. “The tax is already owed. It is just not collected.”

French said he expects the House Judiciary Committee to mark up the legislation, acknowledging progress in the House could take awhile.

“There are 435 House members, [65] of which are cosponsors on this bill,” French said. “I am pretty confident we will be successful in the House, but members are further away from having to make decisions and a lot of them are keeping their powder dry.”

The opposition from some House Republicans could also lose momentum because many governors — Republican and Democrats — have lobbied for the authority to collect sales taxes from online sales.

The legislation is being argued as a tax revenue issue for state governments. According to a 2012 University of Tennessee study, states are estimated to lose about $23 billion in uncollected sales taxes on sales from out-of-state online sellers annually.