Anti-tax guru Grover Norquist isn’t happy about it and the conservative Heritage Foundation is questioning the senators’ conservative credentials. But the issue of taxing Internet sales is getting strong support from Republicans and Democrats alike.
The Senate could vote as early as Thursday on a bill to empower states to require online retailers to collect state and local sales taxes for purchases made over the Internet. Under the bill, the sales taxes would be sent to the states where a shopper lives.
On Wednesday, the bill passed a test vote in the Senate, 74 to 23, with 27 Republicans voting in favor. Senate Majority Leader Harry Reid, D-Nev., vowed to pass the bill this week, before senators leave for a scheduled vacation.
“This is a matter of equity and fairness,” said South Dakota Gov. Dennis Daugaard, a Republican. “The same people who are selling the same products should be paying the same taxes.”
Under current law, states can only require stores to collect sales taxes if the store has a physical presence in the state. As a result, many online sales are essentially tax-free, giving Internet retailers an advantage over brick-and-mortar stores.
It is part of GOP orthodoxy to oppose higher taxes, a central issue that divides Democrats and Republicans. That’s why the bill faces an uncertain fate in the House, where some Republicans regard it as a tax increase.
But supporters of the bill insist it is not a tax increase. Instead, they say, the bill merely provides states with a mechanism to enforce current taxes.
“This bill has nothing to do with imposing any kind of new tax or revenue generator,” said Sen. Bob Corker, R-Tenn. “What this law does is allow states that already have laws on the books to carry out the implementation of those” laws.
In many states, shoppers are required to pay unpaid sales taxes when they file their state income tax returns. In South Dakota, which has no state income tax, taxpayers are supposed to pay a use tax on out-of-state purchases. But Daugaard said the law is widely ignored.
“The difficulty is consumers don’t understand the law,” Daugaard said. “I think that’s true in many other states as well.”
Supporters say the bill is about fairness for businesses and lost revenue for states. Opponents say it would impose complicated regulations on retailers and doesn’t have enough protections for small businesses. Businesses with less than $1 million a year in online sales would be exempt.
Many of the nation’s governors — Republicans and Democrats — have been lobbying the federal government for years for the authority to collect sales taxes from online sales.
The issue is getting bigger for states as more people make purchases online. Last year, Internet sales in the U.S. totaled $226 billion, up nearly 16 percent from the previous year, according to Commerce Department estimates.
The National Conference of State Legislatures estimates that states lost $23 billion last year because they couldn’t collect taxes on out-of-state sales.
Daugaard estimates that South Dakota loses $48 million to $58 million a year, important revenue for a state that doesn’t have an income tax.
The main opposition in the Senate is coming from three states that have no sales taxes: New Hampshire, Montana and Oregon. Delaware doesn’t have a sales tax, either, but both Delaware senators have voted to advance the bill.
“We don’t like the idea of other states auditing our businesses,” said Sen. Jeff Merkley, D-Ore. “They don’t like the idea of being subject to both bureaucrats and potential legal action.”
Norquist, president of Americans for Tax Reform, says the bill is about “money-hungry state legislators.”
“This is a dangerous road to travel, and sets precedent for further expansions of state-level tax collection authority,” Norquist says in a letter to supporters. “Take action now to urge your senators to oppose an Internet sales tax scheme that lets liberal states like California and Illinois tax across their borders!”
The Heritage Foundation says that “real conservatives” oppose the bill and that it would hurt online commerce, force small businesses to jump through new bureaucratic hoops and erode state sovereignty.
But Republican Sen. Lamar Alexander, a former Tennessee governor, said the bill enhances states’ rights because it gives states the authority to enforce their tax laws.
“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,” Alexander said.
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