The Senate sided with traditional retailers and financially strapped state and local governments Monday by passing a bill that would widely subject online shopping -- for many a largely tax-free frontier -- to state sales taxes.
The Senate passed the bill by a vote of 69 to 27, getting support from Republicans and Democrats alike. But opposition from some conservatives who view it as a tax increase will make it a tougher sell in the House. President Barack Obama has conveyed his support for the measure.
Under current law, states can only require retailers to collect sales taxes if the store has a physical presence in the state.
That means big retailers with stores all over the country like Wal-Mart, Best Buy and Target collect sales taxes when they sell goods over the Internet. But online retailers like eBay and Amazon don't have to collect sales taxes, except in states where they have offices or distribution centers.
As a result, many online sales are tax-free, giving Internet retailers an advantage over brick-and-mortar stores.
"We ought to have a structure in place in the states that treats all retail the same," said Matthew Shay, president and CEO of the National Retail Federation. "Small retailers are collecting (sales tax) on the first dollar of any sale they make, and it's only fair that other retailers who are selling to those same customers the same product have those same obligations."
The bill would empower states to require businesses to collect taxes for products they sell on the Internet, in catalogs and through radio and TV ads. Under the legislation, the sales taxes would be sent to the state where the shopper lives.
Supporters say the current tax disparity is turning some traditional stores into showrooms, where shoppers pick out items they like, then buy them on the Internet to avoid sales taxes.
"It's about the way commerce has changed in America," said Sen. Dick Durbin, D-Ill. "Bookstores, stores that sell running shoes, bicycles and appliances are at a distinct disadvantage. They've become showrooms."
Internet giant eBay is leading the fight against the bill, along with lawmakers from states with no sales tax and several prominent anti-tax groups. The bill's opponents say it would put an expensive obligation on small businesses because they are not as equipped as national merchandisers to collect and remit sales taxes at the multitude of state rates.
"Giant retailers have a requirement to collect sales taxes nationwide because they have physical presence nationwide," eBay president John Donahoe wrote in an online column over the weekend. "Likewise, today small retail stores and online retailers collect sales taxes for the one state where they are located. That's a fair requirement."
"If the bill passes, small online businesses would have the same tax compliance obligations and face the same enforcement risks as giant retailers, despite the fact that they are usually located in just one state."
Businesses with less than $1 million in online sales would be exempt. EBay wants to exempt businesses with up to $10 million in sales or fewer than 50 employees.
Some states have sales taxes as high as 7 percent, plus city and county taxes that can push the combined rate even higher. For example, the combined state and local sales tax is 9 percent in Los Angeles and 9.25 percent in Chicago. In New York City, it's 8.5 percent and in Richmond, Va., 5 percent. In many states, shoppers are already required to pay unpaid sales tax when they file their state income tax returns. However, states complain that few taxpayers comply.
Many 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 government estimates.
States lost a total of $23 billion last year because they couldn't collect taxes on out-of-state sales, according to a study done for the National Conference of State Legislatures, which has lobbied for the bill. About half of that was lost from Internet sales; half from purchases made through catalogs, mail orders and telephone orders, the study said.
Supporters say the bill makes it relatively easy for Internet retailers to comply. States must provide free computer software to help retailers calculate sales taxes, based on where shoppers live. States must also establish a single entity to receive Internet sales tax revenue, so retailers don't have to send it to individual counties or cities.
Opponents worry the bill would give states too much power to reach across state lines to enforce their tax laws. States could audit out-of-state businesses, impose liens on their property and, ultimately, sue them in state court.
In the Senate, lawmakers from three states without sales taxes are leading the opposition: Montana, New Hampshire and Oregon. They argue that businesses based in their states should not have to collect taxes for other states.
Delaware also has no sales tax, though Delaware's two senators support the bill.
Grover Norquist, an anti-tax advocate, and the conservative Heritage Foundation oppose the bill, and many Republicans have been wary of crossing them.
Even so, the issue has a bipartisan flavor. The main sponsor, Sen. Mike Enzi, is a conservative Republican from Wyoming. He has worked closely with Durbin, a liberal Democrat.
In the House, Republican Speaker John Boehner has not commented publicly about the bill, giving supporters hope that he could be won over.
Rep. Bob Goodlatte, R-Va., chairman of the House Judiciary Committee, which would have jurisdiction over the bill, has cited problems with the legislation but has not rejected it outright.
"While it attempts to make tax collection simpler, it still has a long way to go," Goodlatte said in a statement. Without more uniformity in the bill, he said, "businesses would still be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions."
Goodlatte said he's "open to considering legislation concerning this topic but these issues, along with others, would certainly have to be addressed."