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Democrats Turn to Online Sales Tax for New Revenues Following Debt Battle

A box from Amazon.com is pictured on the porch of a house in Golden, Colorado in this July 23, 2008 file photograph.Reuters

While the nation was captivated by the debt crisis – and whether tax increases would be part of any deal to reduce federal deficits – a group of Democratic senators and congressmen have rolled out legislation that would raise new revenues by targeting online sales from retailers like Amazon.

These lawmakers say that states are losing billions in uncollected state and local sales tax on Internet sales and are touting the support of Amazon and other online retailers who say they’re fine with an across-the-board system that would make tax collections simple.

But small businesses say the new legislation is unfair and puts them at a cost disadvantage at a time when they can least afford it.

The bill introduced by Sen. Dick Durbin, D-Ill., last week called the Main Street Fairness Act, has drawn support from several Democrats, including Sens. Tim Johnson of South Dakota, Jack Reed of Rhode Island, Reps. John Conyers of Michigan, Peter Welch of Vermont and Heath Shuler of North Carolina.

“Consumers shouldn’t have to face the burden of reporting all of their online purchases. Main Street retailers collect sales taxes on behalf of consumers, why shouldn’t online retailers do the same,” Durbin said in a statement Friday.

Durbin noted that states are expected to lose up to $24 billion in uncollected state and local taxes this year on Internet and catalog sales.

“This bill will level the playing field for local businesses, by ensuring that online retailers collect the same sales taxes that brick-and-mortar retailers already do,” Conyers said. “This will help our state and local governments avoid devastating layoffs and cuts to essential services vital to the well-being of our local communities.”

But several tech groups strongly oppose the bill.

“Congress often says that small businesses are the backbone of the economic recovery, but these new collection costs will break the backs of many small online businesses,” said Steve, DelBianco, executive director of NetChoice, a tech trade group.

“It’s a cruel irony to call this job-killing bill the ‘Main Street Fairness Act,’” DelBianco added. “Online sales are about the only way small retailers can survive being steamrolled by the big-box chains who are behind this bill.”

Retailers are only required to collect sales tax in states where they also have a physical presence under a 1992 Supreme Court ruling known as the Quill decision. The high court ruled that a sales tax on out-of-state sellers would be an unconstitutional burden on interstate commerce because of the complexity of states’ and municipalities’ sales tax rules.

That means out-of-state retailers can offer their customers a discount online, but consumers have to report the sales tax owed on online purchases on their tax returns.

In response to the Quill decision, 44 states and the District of Columbia are working with local governments and the business community to adopt a sweeping interstate system to simplify their sales tax rules and administrative requirements, called the Streamlined Sales and Use Tax Agreement. So far, 24 states have changed their laws in compliance with this interstate agreement.

But the Quill decision said Congress would have to authorize such an agreement, which supporters say the bill does.

Amazon.com Inc., the largest online Internet retailer, threw its support behind the bill.

“Amazon.com has long supported a simple, nationwide system of state and local sales tax collection, evenhandedly applied to all sellers, no matter their business model, location, or level of remote sales,” Paul Misener, vice president of Amazon’s global public policy, said in a letter to Durbin that the Illinois senator included in a press release.

“To this end, I am writing to thank you for your bill that would allow states that sufficiently simplify their rules to require collection of sales tax by out-of-state sellers,” he wrote.

The Retail Industry Leaders Association, which represents more than 200 retailers, also supports the bill, saying it would end special treatment for online-only retailers and relieve consumers of the tax-reporting requirement.

“For too long, U.S. tax policy has favored online-only retailers over the brick-and-mortar stores that creates the jobs and serves our communities,” said Katherine Lugar, a spokeswoman for the association.

“Government shouldn’t be picking winners and losers by giving a handful of companies a competitive advantage over everyone else,” he said. “It’s time to close this decades-old loophole and level the playing field for all retailers.”

But the Computer and Communications Industry Association opposes the bill, saying that taxing small Internet businesses with the most potential for economic growth is unfair.

“E-commerce has enabled businesses to broaden the scope of their activities beyond traditional geographical limitations,” said Ed Black, president and CEO of CCIA. “Sadly, this bill seeks to re-impose onto e-commerce businesses the very burdens that innovation has enabled them to overcome, and has given them a chance for success.”

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