US Senate approves Internet sales tax

The Marketplace Fairness Act next goes to the House, where it may run into opposition

The U.S. Senate has voted to allow states to collect sales tax from online retailers, making it more difficult to buy tax-free products online.

The Senate's vote of 69-27 for the Marketplace Fairness Act late Monday sends the bill to the House of Representatives, where it may face opposition from many antitax Republicans. U.S. President Barack Obama has voiced support for the bill, meaning he would sign it into law if the House passed it.

The bill would allow states to collect sales tax on large Internet sellers that have no presence within their borders, curtailing the ability of Internet shoppers to avoid sales tax. Now, online retailers only have to collect taxes in states where they have a physical presence, including retail stores and warehouses.

A bipartisan group of senators voted for the bill, with many Republicans, often against new taxes, voting for it.

Supporters argue the Internet sales tax would not be a new tax because the 45 states that levy sales taxes require residents to report their Internet purchases and pay taxes on them. More than 90 percent of people ignore the requirement or don't know about it, and states have not enforced those rules.

The bill would protect small Main Street businesses from unfair competition from Internet sellers and would allow states to collect sales tax that's already owed, said Senator Lamar Alexander, a Tennessee Republican. "This is common sense," he said. "This is fairness. This is states' rights."

Small brick-and-mortar businesses, because of state and local sales taxes, have to charge 5 percent to 10 percent more than Internet competitors, supporters argued.

But lawmakers shouldn't create new regulations for small online businesses when the U.S. economy is still sluggish, said Senator Ted Cruz, a Texas Republican. Lawmakers should focus on creating economic growth, he said.

"This bill goes in the exact opposite direction," Cruz said. "It would be a mistake to do anything to impinge the entrepreneurial growth of the Internet."

Savvy Internet shoppers would still be able to avoid paying sales taxes, because businesses with less than US$1 million in annual Internet sales would be exempt from collecting the taxes. More than 90 percent of Internet sellers would be exempt from collecting the taxes, according to bill supporters.

Lawmakers have been fighting for more than a decade to pass Internet sales tax legislation, and some businesses have called on Congress to fix the problem since a 1992 Supreme Court case that prohibited states from collecting sales tax from sellers that have no physical presence within their borders.

The court, however, left an opening for Congress to streamline sales tax collection and allow out-of-state sales tax collection.

NetChoice, an e-commerce trade group, called the bill "a massive new tax regime on all forms of e-commerce." The legislation will expose Internet sellers to tax audits from 45 states, the group said.

"The Senate's new Internet tax may be cause for celebration in the boardrooms of the big box stores that supported it, but everyone else is in for a rude awakening when hundreds of state auditors are turned loose on thousands of small and mid-sized employers nationwide," NetChoice Executive Director Steve DelBianco said in an email. "We now look to the House of Representatives to fix the catastrophic flaws in this bill, and to protect the Internet economy as it continues to drive our fragile economic recovery."

Among the groups supporting the Marketplace Fairness Act are the American Conservative Union, Consumer Electronics Association, the National Retail Federation, the Retail Industry Leaders Association, Amazon.com, Best Buy, the American Booksellers Association and the Alliance for Main Street Fairness.Opposing the bill are several trade groups and Internet companies, including TechAmerica, the Financial Services Roundtable, the Competitive Enterprise Institute, eBay, Etsy, the Information Technology Industry Council, the National Taxpayers Union and TechNet.

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.

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