Internet sales tax bill divides Republicans, vote looms in Senate

After holding firm against virtually any kind of tax increase, some congressional Republicans have found one that doesn't make them cringe.

A contentious bill which could come for a final vote in the Senate as early as Thursday would empower states to make online retailers collect sales taxes for purchases made over the Internet. Though it would likely face more resistance in the House, where the anti-tax creed is more pronounced, a number of Senate Republicans -- and Republican governors -- are supporting the bill.

The legislation passed a test vote in the Senate Wednesday, 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.

Some of the most powerful anti-tax advocacy groups in Washington are still fighting to block the bill. Grover Norquist, president of Americans for Tax Reform, warns the bill would set a "precedent for further expansions of state-level tax collection authority."

He said the bill is about "money-hungry state legislators."

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    The Heritage Foundation says that "real conservatives" oppose the bill and that it would hurt online commerce and force small businesses to jump through new bureaucratic hoops.

    Yet a number of prominent conservatives are voicing support for the plan. Under the bill, the sales taxes would be sent to the states where a shopper lives. Under current law, states can only require online companies 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.

    While Republicans generally oppose higher taxes -- and agreed to an increase on top earners as part of the fiscal crisis deal only after negotiating a narrower hike than the administration originally envisioned -- supporters of the Internet sales tax 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."

    South Dakota Gov. Dennis Daugaard, a Republican, called it a "matter of equity and fairness."

    "The same people who are selling the same products should be paying the same taxes," he said.

    Supporters say the bill is about fairness for businesses and lost revenue for states.

    But 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.

    While online giant Amazon has come around to the tax, major online retailers like eBay are strongly opposing it.

    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."

    The Associated Press contributed to this report.