Online sticker shock just got a bit closer.
Internet retailers soon could be required to collect the same sales taxes that consumers pay to their bricks-and-mortar peers, after the Senate agreed Monday to send the Marketplace Fairness Act to the floor for a final vote in coming weeks.
Taxes on Internet commerce already exist formally. When consumers buy online, they are supposed to pay the sales tax directly to the government. But most people don't realize this because they are accustomed to brick-and-mortar stores charging the sales tax and passing it on to the state.
The Marketplace Fairness Act, sponsored by Sen. Richard J. Durbin, Illinois Democrat, and Michael B. Enzi, Wyoming Republican, would fix this quirk in the tax system by requiring most large Internet retailers to collect the tax.
"All businesses and their retail sales, all consumers and their purchases should be treated equally," Mr. Enzi said during Senate floor debate. "Some argue the bill is a disguised attempt to create taxes. It is not. Consumers are already supposed to pay these taxes."
Opponents say it would be an overreach by a few states and fear the system would be too complicated for Internet retailers to deal with, forcing many of them out of business.
Sen. Max Baucus, Montana Democrat and an opponent of the Marketplace Fairness Act, said senators should take more time to consider the consequences of the bill.
"This legislation is new, only recently introduced, never has been vetted," Mr. Baucus said during floor debate. "This bill is fraught with all kinds of problems."
The Senate agreed Monday to send the bill to the floor for a final vote in a 74-20 decision, making passage in the upper chamber almost certain.
The vote could take place as early as Wednesday, or after the Senate returns from a weeklong vacation in May.
If it passes in the Senate, the Marketplace Fairness Act then would go to the House for a vote, where there is also growing support for a bill that would make Internet retailers collect sales tax.
On Monday, the Obama administration also threw its support behind the Marketplace Fairness Act.
"This bill would eliminate the unfair advantage currently enjoyed by big out-of-state online companies over local neighborhood-based small businesses," the White House said in a statement.
Supporters say the Marketplace Fairness Act would level the playing field for traditional retailers, which have long suffered from lost sales because their prices seem higher compared with online stores that don't collect sales tax.
"It is critical that the tax laws do not discriminate between similar businesses based on how their products are distributed," the National Retail Federation wrote in a letter to Senate Majority Leader Harry Reid, Nevada Democrat.
But Internet retailers say that collecting sales tax will be complicated. In addition to 46 states, nearly 10,000 local jurisdictions across the country charge some form of sales tax and opponents fear that this bill would make it difficult for Internet retailers to keep up.
Opponents complain that the Marketplace Fairness Act could force small Internet sellers out of business. While Internet-based giants such as Amazon and eBay can afford the complicated task of accurately computing, collecting and paying sales taxes to all the various governments, smaller online retailers may have more trouble keeping up with the complexities of the task.
Supporters point out that small Internet retailers that handle less than $1 million in revenue each year will not have to comply with the law.
"The legislation will level the playing field for retailers, while protecting small businesses from complicated laws in other states with a healthy small business exemption," according to the NRF letter.
Werherecoalition.org, a collection of web-enabled business retailers around the country, challenged the bill's definition of a small Internet company. The group points out that the Internal Revenue Service defines a small business as a company with annual revenue figures of $20 million or less, while the Small Business Administration sets the bar at $30 million in revenue.
"Essentially, any company with more than a few employees would be hit by this tax," the organization said in a statement.
To lighten the burden on Internet retailers, the Marketplace Fairness Act also would require states that want Internet retailers to collect taxes for them provide these online stores with software that helps them track the different rates.
The Marketplace Fairness Act also has supporters and opponents both claiming the mantle of "states' rights."
Supporters say each state should have the right to collect taxes from commerce with its own residents, without being undermined by out-of-state shippers. But opponents argue that any state attempting to force an out-of-state business to do its dirty work of tax collection violates another state's right to regulate its own corporate residents and their commerce.
"If you want to do business in Illinois [with a brick-and-mortar store], you would move to Illinois and have to play by Illinois rules," Mr. Durbin said Monday during debate on the Senate floor. "We think the same rules should apply to Internet sales, too."
But opponents argue this would lead to a form of "taxation without representation" since businesses would be forced to collect taxes on behalf of jurisdictions from which they do not receive the benefits of being located in that community.
"It essentially allows taxation without representation," said Josh Withrow, legislative affairs manager at FreedomWorks, who explained that businesses would "pay taxes to other states without ever getting the benefit of the use of those tax dollars."
"They have no option to vote out the officials who are collecting these taxes," he added, "because they have no jurisdiction."
FreedomWorks would rather see a system where each online retailer collects the sales taxes for the jurisdiction where their business is located, and not from where the consumer lives.
They call this an "origin-based" tax, as opposed to a "destination-based" tax, and say that it would make the process of collecting sales taxes much easier and less complicated, because they would have to deal with only one tax rate.
"We wouldn't be as mad about it," Mr. Withrow said, though he would prefer that Internet retailers not be required to collect taxes at all. "It's the location of the business that should dictate the tax rate."
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