Senate to debate whether online retailers must collect sales tax

The Senate could soon decide whether consumers will have to shell out taxes on more of their online purchases.

The U.S. Senate Committee on Commerce, Science, and Transportation is scheduled to hold a hearing today to examine the current policy that exempts many online retailers from collecting sales tax. The present ruling is based on a 1992 Supreme Court decision, which found that businesses without a physical presence in a state are not required to collect state sales tax.

But up for debate this afternoon is the Marketplace Fairness Act (PDF), which would reverse the Supreme Court decision. Senators and others who support the bill have argued that the current policy puts brick-and-mortar stores at a disadvantage and robs state governments of billions in tax dollars.

If passed, the act would force consumers to pay sales taxes to online vendors that generate a certain level of sales. The Senate bill would exempt online retailers with up to $500,000 in gross annual sales. A similar bill in the House would exempt businesses that gross up to $1 million in sales each year.

In its decision 20 years ago, the Supreme Court argued that keeping track of each individual state's tax rate would be difficult for online retailers. But supporters of the bill claim that it would simplify and streamline the tax system to make it easier for online vendors to comply with each state's tax rules.

The National Retail Federation, a trade association for physical and online retailers, is in favor of the bill.

"Brick-and-mortar retailers are major contributors to the health of local communities and should not be placed at a disadvantage compared to remote [and online] sellers that have no local presence," NRF Senior Vice President David French said in a statement. "This disadvantage is not created by the marketplace, but rather it is imposed by the current state of the law following the Quill [Supreme Court] decision, stifling retailers across the country."

Debate is likely to center not just on the bill itself but on the threshold applied to online vendors.

Amazon, which has fought against state sales tax collection, supports the bill, as long as smaller businesses are not exempt. But eBay, which counts many small businesses among its customers, is against the bill, USA Today reported.

"It's small businesses who would face the biggest new burden if you change this law the way that's being proposed," Brian Bieron, eBay's senior director of federal government relations, said, according to the newspaper.