May 7 (Bloomberg) -- The U.S. Senate voted to let states require out-of-state Internet retailers and catalog companies to collect sales taxes, a victory for brick-and-mortar businesses that have been lobbying on the proposal for more than a decade.
The measure now goes to the U.S. House, where the issue is dividing Republicans and won’t receive a quick vote.
The Senate measure, passed yesterday on a 69-27 bipartisan vote, would end the era of tax-free Internet shopping. It is backed by Wal-Mart Stores Inc. and other retailers that say it’s unfair that sellers only have to collect sales taxes on purchases made by residents of states where an Internet company has a physical presence.
“It’s a rare opportunity for us to have Republicans and Democrats together on the floor to support a bill that has the endorsement of business and labor and local officials all across the United States,” said Senator Richard Durbin of Illinois, the chamber’s second-ranking Democrat and a co-sponsor of the proposal.
States lose an estimated $23 billion annually in forgone revenue from uncollected sales taxes. During yesterday’s debate, senators offered examples of consumers who examine products in stores and then shop online for those same items to avoid paying sales tax. The measure exempts businesses with less than $1 million a year in out-of-state sales.
Republicans were almost evenly divided with 21 voting in favor of the measure, including Richard Shelby of Alabama, John Thune of South Dakota and John Hoeven of North Dakota. Twenty-two Republicans voted no, including Minority Leader Mitch McConnell of Kentucky, Marco Rubio of Florida and Charles Grassley of Iowa.
Five Democrats voted no: Ron Wyden and Jeff Merkley of Oregon, Max Baucus and Jon Tester of Montana, and Jeanne Shaheen of New Hampshire. All are from states without sales taxes.
The Republican-controlled House probably won’t act quickly or pass a bill in the same form as the Senate. Some anti-tax House members oppose the bill and others support it. To pass a measure, House leaders may have to rely on Democratic votes and overcome objections from many of their own members.
Representative Bob Goodlatte, a Virginia Republican and chairman of the House Judiciary Committee, said in a statement after the vote that House consideration will be “more thoughtful” than in the Senate, which bypassed a committee vote.
Goodlatte said he is “open to considering legislation” though he said the Senate bill wasn’t “sufficiently simplified.” He said his panel would look at alternatives to let states “collect sales tax revenues without opening the door to aggressive state action against out-of-state companies.”
House Speaker John Boehner and Majority Leader Eric Cantor, both Republicans, haven’t taken positions on the legislation, instead deferring to Goodlatte. Boehner said today that he hasn’t talked with Goodlatte about the issue.
Michael Kercheval, president of the International Council of Shopping Centers, said opponents’ concerns about complying with multiple states’ rules have been overstated.
“This simply puts those online out-of-state retailers on a level playing field with the in-state brick-and-mortar retailers,” Kercheval said yesterday on Bloomberg Television’s “Bottom Line” with Mark Crumpton.
Brian Bieron, a spokesman for online auction site EBay Inc., which opposed the measure, said in a statement, “A lot more work needs to be done to get the Internet sales tax issue right,” including protecting businesses with less than $10 million in sales or fewer than 50 employees.
The legislation, supported by the Obama administration, attracted a coalition of backers including Best Buy Co., Amazon.com Inc. and shopping mall owners. Amazon, the largest Internet-based retailer, is expanding into more states to speed delivery, which means it will pay taxes anyway.
States would be required to join an interstate compact with streamlined rules or provide software to retailers.
Customers who make purchases from out-of-state retailers currently are required to pay use taxes on those purchases. Few do, and states have made only minimal efforts to collect those taxes, instead lobbying Congress for a national solution.
The bill would in effect reverse a 1992 U.S. Supreme Court decision that prohibited states from taxing businesses that lack a physical presence inside their borders.
Opponents maintained that the bill would unfairly burden small businesses with paperwork and audits, create a tax advantage for foreign sellers and potentially allow state-level transaction taxes. Detractors included anti-tax groups, direct marketers and senators from states without sales taxes.
In the House, the bill is sponsored by Wal-Mart’s hometown congressman, Republican Steve Womack of Arkansas. It has attracted 65 co-sponsors, including such Republicans as Joe Barton of Texas, Spencer Bachus of Alabama and Ander Crenshaw of Florida.
During yesterday’s debate, Senator Ted Cruz, a Texas Republican who voted no, said the measure would benefit the big businesses that support it.
“The impact of this bill is to hammer the small-business online retailers, to make it harder for the little guys to compete,” he said.
The measure would require businesses in his state to collect taxes for states like California and New York even though the businesses couldn’t influence those states’ laws, Cruz said.
The bills are S. 743 and H.R. 684.
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