Senate Passes Online Sales Tax Bill; House to Decide Its Fate

It's the first time any version of the legislation, which state and local leaders have long fought for, has ever been approved by either chamber of Congress.
by | May 7, 2013
 

The U.S. Senate passed the Marketplace Fairness Act (MFA) 69 to 27 Monday night, marking a historic victory for state and local leaders who have long advocated for Congress to give them the ability to collect sales taxes from online purchases.

The vote was the first time that any version of the legislation has ever been approved by either chamber of Congress.

The action now falls on the U.S. House, where -- although they're still optimistic -- advocates for the bill concede they're likely to face more scrutiny as they try to make their case for the legislation.

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"I think it's important that this legislation moves consistently with the momentum that the Senate is sending it on with," says Lars Etzkorn, program director for federal relations at the National League of Cities, one of many state and local government groups that has thrown its weight behind the bill.

As it stands, the House version of the Marketplace Fairness Act has a bipartisan group of 65 co-sponsors. Etzkorn says he hopes that the legislation gets a hearing in the House Judiciary Committee, where the details of the bill -- including tweaks that might appease its critics -- could be hammered out.

In the Senate, the legislation bypassed the committee process and went directly to the Senate floor. Otherwise, it would have needed to pass through the Senate Finance Committee where Chairman Max Baucus is an ardent critic of the bill.

Bill Heads to House

House Speaker John Boehner and House Majority Leader Eric Cantor haven't made public statements about the legislation. But House Judiciary Committee Chairman Bob Goodlatte (R-Va.) has expressed skepticism of the bill. Etzkorn says that's not discouraging. "He's doing what a chairman should do."

Meanwhile, the White House has already announced its support of the legislation.

Indeed, the battle over MFA has created some interesting political alliances. While it would seem the bill might be a non-starter with conservative House Republicans (after all, it would result in Americans paying taxes on more of their purchases), it's gotten some support from what may seem like unusual sources. The American Conservative Union and Reagan administration economist Arthur Laffer have both backed the legislation. In the Senate, conservative co-sponsors included Sens. Bob Corker (R-Tenn.) and Roy Blunt (R-Mo.)

With the action now shifting to the House, several parts of the bill -- including when it could take effect and the threshold for the size of a business impacted  -- could potentially be open for negotiation. The bill might also be tweaked to address whether online retailers would be subject to state audits as well as civil liability if software errors cause them to collect taxes at inaccurate rates.

The Tax-Increase Debate

Carl Davis, senior analyst at the Institute on Taxation and Economic Policy, says one of the biggest challenges in the House will be the infamous document many members have signed in which they've pledged not to raise taxes. Grover Norquist, the man behind that pledge, has come out as an opponent of the legislation.

"In the House, especially, the main argument against the legislation is a very surface level one: it looks a little too much like a tax increase for our comfort level," says Davis, who supports the legislation.

MFA backers have consistently made the point that the bill doesn't create new taxes; it simply requires online retailers to collect taxes that are already owed. Technically, many taxpayers are supposed to file "use" taxes for their online purchases when the retailer fails to collect them. But in reality, hardly anyone pays those taxes voluntarily, which would make the MFA effectively feel like a tax increase to most Americans.

Jason Brewer, a spokesman for the Retail Industry Leaders Association, says his group will be working to build the case for MFA among rank-and-file members of the House. The pitch his organization makes to lawmakers emphasizes the equity it promotes between online and brick-and-mortar retailers. As it stands, Brewer says, "you're essentially subsidizing online retailers by giving them special tax treatment; that's not the most effective way for a free market to operate."

Indeed, many state and local leaders say that the heavy involvement of the retail industry has been something of a tipping point for the legislation. In the past, state and local leaders have clamored for the legislation as a tool to help them collect revenue. Now, it appears, the case for "equity" and the "free market" are messages that have more resonance with federal lawmakers.

Davis says it's also no coincidence that support for the legislation has advanced further as more sales increasingly shift to cyberspace.

"The sales tax is in serious trouble if anyone with a smartphone or a laptop can avoid paying it," he says.

All Online Retailers Not Yet On Board

Still, the legislation has its skeptics, who will work ardently to address their criticisms of the legislation. Jonathan Johnson, a senior executive with Overstock.com, said his company isn't opposed to online sales taxes per se but it doesn't like MFA in its current form.

"With a few crucial tweaks," Johnson says, the company would come on board.

Overstock.com wants a guarantee that if the bill passes, federal law will pre-empt state law, and states won't continue to try to tax online retailers through methods that differ from MFA parameters.

Also in its current form, MFA would require states to provide online retailers with tax software to help them sort through the different tax rates. Overstock.com instead would prefer for online retailers to acquire their own software and then be compensated by the states for their efforts.

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