Senate Could Pass Online Sales Tax Bill This Week

The legislation, which would allow states to collect sales taxes from Internet retailers, now has the White House's backing.
by | April 23, 2013
 

The Senate this week could finally pass the Marketplace Fairness Act (MFA) after years of advocacy by state and local officials and retailers.

On Monday, the Senate voted 74-20 to open debate on the legislation. The move comes on the heels of a non-binding March vote, in which 75 Senators voted in favor of including it in the budget resolution (a vote seen as a test to gauge support for the bill). The legislation also scored a major victory this week when the White House announced its support.

If the Senate passes the legislation this year, it would mark the first time either chamber of Congress has approved collecting sales tax from online sales.

For years, state and local leaders have pushed for legislation like the Marketplace Fairness Act, which would empower them to demand that online retailers collect sales tax from customers on their behalf, similar to the way physical retailers already do. About a year ago, the legislation started gaining serious traction.

The change could generate billions of dollars for state and local governments, though it's unclear exactly how much. One widely-cited estimate predicts more than $11 billion a year, though some have suggested that figure is way too high.

The bill has been one of the biggest legislative priorities for associations representing state and local government in Washington, which argue that Americans' embrace of e-commerce is denying communities much-needed revenue. "This bill levels the playing field between online merchants and local brick and mortar businesses, and addresses lost revenue that counties rely on to keep American communities healthy, vibrant, safe and fiscally sound," Matt Chase, executive director of the National Association of Counties, said in a statement.

David Quam, who leads federal relations efforts for the National Governors Association, says there's been a shift in attitudes in Congress towards MFA for a few reasons. One is that the latest bill gives states several options in simplifying and unifying their tax rules to allow for online sales tax collection. The other is that members of Congress have finally reached a tipping point where they've heard about the issue enough from advocates that they're knowledgeable of the challenge and potential solutions.

The Senate bill is sponsored by Republican Sen. Mike Enzi of Wyoming, and identical legislation is pending the House.

Advocates for MFA have framed the legislation as a way to help brick-and-mortar retailers, who they say face an unfair competitive disadvantage, since they're forced to sell at higher prices than their online counterparts who generally don't collect sales tax.

In particular, they've blasted the practice of "show-rooming," in which customers will visit physical retailers to see and feel products, then purchase them online in order to get a discount by avoiding sales tax. "While local, community-based stores and shops compete for customers on many levels, including service and selection, they cannot compete on sales tax," Matthew Shay, CEO of the National Retail Federation, said in a statement.

Others have highlighted MFA as a states' rights issue, arguing it's not the feds' role to tell state and local governments how to structure their tax systems. "Tennessee wants to avoid a state income tax and treat businesses fairly in the marketplace, and it shouldn't have to play "Mother, May I?" with the federal government to do so," Republican Sen. Lamar Alexander of Tennessee said in a statement.

The legislation also has the backing of developers and owners of retail shopping centers. Localities generally raise revenue from sales tax and property tax. Declining sales tax revenue due to a shift towards e-commerce would seemingly necessitate higher property taxes, which would be bad for business, says Michael Kercheval, president and CEO of the International Council of Shopping Centers.

Still, the legislation has plenty of critics. On Monday, eBay sent a note to its customers urging them to fight the bill, saying it means higher prices for consumers and a more burdensome tax collection process for its sellers.

As it stands, online businesses doing less than $1 million in annual sales are exempt from the sales tax requirement. But eBay is advocating for a higher threshold of $10 million. Others argue the system is too complicated for online retailers.

"This legislation doesn't help businesses expand and grow and hire more employees," Democratic Sen. Max Baucus of Montana said in prepared remarks from the Senate floor. "Instead, it forces small businesses to hire expensive lawyers and accountants to deal with the burdensome paperwork and added complexity of tax rules."

Advocates of MFA insist that the technology exists to ensure collections aren't burdensome. The legislation calls on states to make tax software available to businesses.

The Electronic Retailing Association accused MFA backers of "rushing quick passage" of the legislation. Indeed, Senate Majority Leader Harry Reid of Nevada has allowed MFA to go directly to the Senate floor and bypass the committee process.

But while the bill has gotten a sudden flurry of action lately, the issue has been a thorny one since at least 1992, when the Supreme Court ruled that catalog retailers didn't have to collect sales taxes from out-of-state customers in places where their businesses lacked a physical presence.

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