Online Sales Tax Bill Moves Through Senate

April 25, 2013

pic-tax-onlineOn April 16, Sen. Mike Enzi (R-Wyo.) introduced the Marketplace Fairness Act (S. 743), legislation that would allow states to collect taxes from online sales. Sens. Dick Durbin (D-Ill.) and Lamar Alexander (R-Tenn.) have been the most vocal cosponsors of the bill, which include a bipartisan group of 26 senators.

Earlier this week, Monday April 22, S.743 overcame a key procedural hurdle, as the Senate voted 74-20 on a cloture vote to cut off a filibuster of the motion to proceed to the bill. On Wednesday, the bill cleared another procedural motion by a vote of 75-22, and floor debate resumed despite not reaching an agreement on amendments for consideration. Supporters of the bill are hoping for passage by Friday, pending all amendments are germane to the legislation. However, Majority Leader Harry Reid (D-Nev.) has said the chamber will stay in session until this legislation is finished—meaning possible weekend votes.

Several amendments have already been filed, including a proposal by Sen. Mark Pryor (D-Ark.) that would extend a moratorium on taxing Internet access until 2024. Sen. Jeanne Shaheen (D-N.H.) proposed an amendment that would exempt from the bill businesses that are incorporated in non-sales tax states. Sen. John Thune (R-S.D.) also is expected to offer amendments.

The bill in its current iteration would allow states to require that Internet retailers located outside their borders collect sales taxes on purchases by their residents. Businesses with less than $1 million in annual online sales would be exempt, and the sponsors have estimated that fewer than 1,000 businesses would be required to collect sales taxes.

Forty-six states use sales taxes, and a 1992 Supreme Court decision stipulated that states can only tax sellers with a physical presence in the state. The Marketplace Fairness Act grants states the power to collect taxes from remote businesses, which may only conduct their sales efforts through the internet. Some of the senators from states without a sales tax have been particularly critical, stating that the bill would shift the burden of tax collection from the government to online retailers in their states.

States are technically required to collect online sales taxes, but the majority of purchases go untaxed. Under the current tax loophole, while brick-and-mortar retailers collect sales and use taxes from customers who make purchases in their stores, many online and catalog retailers do not collect the same taxes. Proponents of the bill argue that states cannot continue to lose large quantities of tax revenue, while opponents contend that the bill would place another regulatory burden on business. One of the biggest contentions lies with the $1 million small retailer exemption level which some argue is too small.

There is a clause in the bill which mandates that states must simplify their state sales tax laws in order to simplify the potential problem of multistate tax collection. Essentially, the states have two options. First, they may adopt the measures of the Streamlined Sales and Use Tax Agreement (SSUTA), an interstate initiative which seeks to simplify the administration of sales taxes. Otherwise, they must comply to five simplification measures listed in the bill.

While the Marketplace Fairness Act is expected to pass in the Senate once they bring it to a vote, it is unclear whether the bill will move as quickly through the House. Many senators believe the bipartisan support will create momentum for the bill and pressure the House to pass it. The House bill (H.R. 684) was initially introduced by Rep. Steve Womack (R-Ark.) in February, and it currently has a group of 55 bipartisan cosponsors.

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