Senate takes major step toward Internet sales tax

The U.S. Senate has voted 74-20 to close debate and move to a final vote on a bill allowing states to collect sales tax from out-of-state Internet and catalog retailers.

The Senate's Monday vote sets up an expedited vote on the Marketplace Fairness Act in the coming days. The bill would allow states to collect sales tax on Internet sellers that have no presence within their borders, creating a formal process for collecting taxes that many U.S. residents now owe but don't pay.

The legislation, with more than 80 lawmakers signed on as sponsors in the Senate and House of Representatives, would end an unfair situation in which brick-and-mortar retailers must charge their customers 5 percent to 10 percent more than their Internet counterparts, said Senator Mike Enzi, a Wyoming Republican and lead sponsor of the Internet sales tax bill.

"We should not be subsidizing some taxpayers at the expense of others," Enzi said on the Senate floor. "All businesses and their retail sales should be treated equally."

While supporters argued the bill would only allow states to collect taxes that are already owed, Senator Ron Wyden said U.S. buyers won't see it that way. "This is money that's going to come out of the pockets of American families that has not come out of their pockets before," said Wyden, an Oregon Democrat.

The bill takes the Internet "down a dangerous path" by allowing the government of one state to require businesses in another state to collect its taxes, Wyden said. "The proposal, in effect, unleashes all the nation's tax collectors on small Internet businesses," he said. "There's no difference in New York telling Oregon Internet firms to enforce New York laws than China telling American firms to enforce China's censorship practices."

Momentum in Congress for passing an Internet sales tax bill is growing. Earlier Monday, President Barack Obama's administration signaled that it supports the Internet sales tax bill. If the legislation passes through the Senate, it would still have to pass through the House before going to Obama's desk for his signature.

The bill would "level the playing field for local small business retailers that are in competition every day with large out-of-state online companies," the White House said in a statement.

Forty-six states have sales taxes, and all require residents to report purchases they make from websites and catalogs and pay sales tax. But a 1992 Supreme Court ruling prohibits states from collecting sales tax from sellers that have no physical presence within their borders.

Many U.S. residents don't know of the requirements to pay tax sales taxes on Internet purchases, and the state requirements are largely ignored.

Monday's vote expedites Senate action on the Marketplace Fairness Act, with a final Senate vote on the bill without hearings during this session of Congress. Supporters of the bill have been trying to get a version of an Internet sales tax passed for years, and there have been hearings in the past.

The bill exempts small businesses with less than US $1 million in remote sales a year from collecting the sales taxes. It also requires states that decide to collect remote taxes to provide free tax calculation software to Internet retailers.

But the bill would expose Internet and catalog sellers to tax audits from all states collecting sales taxes, said representatives of four trade groups making up the True Simplification of Taxation (TruST) Coalition. States have not simplified their sales taxes enough to meet the standard set up in the Supreme Court cases, members have argued.

The bill would create a "bureaucratic nightmare" for remote sellers, said Steve DelBianco, executive director of NetChoice, an e-commerce trade group. "It would force businesses to pay more programmers, accountants and lawyers, instead of hiring more manufacturing and sales people," he said during a press conference.

There's no reason for the Senate to push the bill through without a hearing and time for debate, said Ron Barnes, vice president of state affairs for the Direct Marketing Association. The bill "has major flaws and would be a tremendous burden on the backs of remote sellers," he said.

TruST called on sponsors of the bill to build in several additional protections for remote sellers. Lawmakers should require each state to have a single sales tax for remote sales, not separate taxes for cities and other taxing jurisdictions, the group said. States should also have a common definition for what products are taxed and what products are exempt from tax, the group said.

Supporters of the bill argued states are losing out on billions of dollars in tax revenue because they can't now require Internet sellers to collect sales taxes. Many brick-and-mortar stores are serving as "display cases," where potential customers try out products before buying them cheaper online, said Senator John "Jay" Rockefeller, a West Virginia Democrat.

"This strikes me as profoundly unfair," he said.

Rockefeller, a co-sponsor of the Marketplace Fairness Act, downplayed concerns that sales tax collections would be difficult for Internet sellers. "The Internet is the perfect environment to collect sales taxes, because it can be automated," he said.

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.