The Internet Sales Tax Fight Pits Industry Against Industry

Nancy Cook

Proposed Internet sales-tax legislation received a huge boost on Monday when the White House officially backed the bill, saying it would level the playing field among online and retail stores by ensuring that both pay sales taxes.

“Today, while local small-business retailers follow the law and collect sales taxes from customers who make purchases in their stores, many big-business online and catalogue retailers do not collect the same taxes,” White House press secretary Jay Carney. “This puts local, neighborhood-based small businesses at a disadvantage to big, out-of-state, online companies.”

Now, the Senate is scheduled to debate the Internet sales-tax legislation for the remainder of the week, and the bill is largely expected to pass (a similar, nonbinding amendment was approved weeks ago, 75-24).

The so-called “Marketplace Fairness Act” would allow a state to collect sales tax on Internet purchases made by its residents, even if the Internet company has its headquarters in a different state. It would exempt online companies with sales of less than $1 million a year from collecting or paying the sales taxes, and it would add roughly $10.1 billion a year to local government coffers, according to the Congressional Research Service, at a time when most states are looking for any and all fiscal fixes.

But, the essence of the fight really pits industry against industry.

In one corner of the ring are the brick-and-mortar, big-box retail stores like Wal-Mart and Best Buy. They are represented by the powerful National Retail Federation, which argues that online giants such as eBay, Amazon, and should be subject to the same type of sales taxes as retailers. Otherwise, retail lobbyists say, it gives the online companies an unfair advantage. Amazon has already agreed to pay sales taxes in nine states, including New York, Texas, and California.

In the other corner are the Internet companies, which dislike the proposed tax for a bevy of reasons. For its part, eBay, a venue for the storefronts and auctions of individuals and small vendors, wants the bill to include an exemption for small businesses, defined as those with fewer than 50 employees or less than $10 million a year in out-of-state sales. opposes the bill because the company says it would create an onerous system requiring compliance with 50 different state tax codes and collection processes. “A patchwork quilt is not good” when it comes to tax collection, said Jonathan Johnson, an executive.

If the legislation does go into effect, Johnson says should be allowed to pocket 5 to 8 percent of the sales taxes it collects for the states as compensation for its trouble. “One thing we’d like to see is vendor compensation if we’re drafted by states to be tax collectors, particularly if we don’t reside in the states,” he added.

The final layer of complexity to the Internet sales-tax debate in the Senate is the disdain the top tax writers have for the bill as it now stands. Senate Finance Committee members, including Chairman Max Baucus, are displeased that the legislation is not going through the regular order and through committee before it hits the Senate floor.

“This bill forces small businesses across the country to spend time and resources they should be using to create jobs jumping through new bureaucratic hoops,” Baucus said on Monday evening.

Other industries have also raised concerns that the online sales-tax bill could have unintended consequences when it comes to the tax code. The Financial Services Roundtable, which represents 100 financial-services companies, worries that the online sales tax could pave the way for a new transaction tax on financial products.

“A transaction tax on financial services products will hurt retail investors, retired Americans, and small businesses, effectively making it more expensive for them to invest and plan for the long term. Without hearings, these implications and others will not be properly addressed,” Scott Talbott, the Financial Services Roundtable’s senior vice president of public policy, said in a statement.

While lobbyists gird for a major battle this week in the Senate, the biggest impediment to the legislation may come from the House, where the idea of an online sales tax has met more resistance.

In the lower chamber, the legislation falls under the jurisdiction not of the tax-writing committee, but of the Judiciary Committee, because it relates to interstate commerce and allows states to collect taxes instead of raising revenue for the federal government.

“The House Judiciary Committee will clear it up and get it across the finish line, but I don’t think it will go quickly as it does in the Senate,” said David French, senior vice president of government relations for the National Retail Federation. “The House tends to work through regular order, and it’s probably a good idea for this to move through regular order, but they recognize the unfairness of not fixing this.”