Internet tax proposal up for a vote in Senate this week

Internet tax supporters, with backing from Walmart, Macy's, and Best Buy, are hoping a Senate vote will give them enough political leverage to require Americans to pay sales tax when shopping online.

Declan McCullagh Former Senior Writer
Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.
Declan McCullagh
4 min read
Democratic senator Dick Durbin, who has called Internet taxes "a matter of basic economic fairness," is trying to move a plan forward with an amendment this week to the Senate Democrats' budget.
Democratic senator Dick Durbin, right, who has called Internet taxes "a matter of basic economic fairness," is trying to move a plan forward with an amendment this week to the Senate Democrats' budget. Getty Images

Internet tax supporters are hoping that a vote in the U.S. Senate as early as today will finally give them enough political leverage to require Americans to pay sales taxes when shopping online.

Sens. Mike Enzi (R-Wy.) and Dick Durbin (D-Ill.) are expected to offer an amendment to a Democratic budget resolution this week that, by allowing states to "collect taxes on remote sales," is intended to usher in the first national Internet sales tax.

"We're working overtime in pushing this, talking to our members, activating our grassroots," says Stephen Schatz, a spokesman for the National Retail Federation. The group's board members include OfficeMax, Macy's, the Container Store, and Saks, which argue it's only fair to force Americans to pay sales taxes when buying from online retailers.

The justification for the proposal reprises arguments that state tax collectors have made for at least a decade: online retailers that don't always collect taxes are unreasonably depriving state governments of revenue and enjoy an unfair competitive advantage over big box retailers that do collect taxes. On the other hand, there are close to 10,000 jurisdictions that can levy taxes, each with its own rules and ability to conduct audits, and complying with all of those as a small retailer is not a trivial task.

Taxpayer advocates say an endorsement of a multi-billion dollar tax hike on Americans shouldn't be snuck into an unrelated budget bill (PDF) that's expected to be voted on before senators leave for an Easter recess. The National Taxpayers Union set up a petition to Congress this week calling the amendment "really just a way to unleash state tax collectors on the Internet," and 15 conservative groups sent a letter last week to members of Congress saying an Internet tax law is "is bad news for conservative principles and the cause of limited government."

They're joined by by eBay, an association of small Internet sellers called W R HERE, and NetChoice, which includes Facebook, Yahoo, LivingSocial, and AOL as members.

The proposed amendment "does nothing to address what the Supreme Court says was an unreasonable burden on interstate commerce," says Steve DelBianco, executive director of NetChoice. "It's an unprecedented expansion of state sales tax authority."

Enzi and Durbin sponsored the separate Marketplace Fairness Act of 2013 (S.336), introduced last month, which has 25 other Senate supporters and would authorize state governments to collect taxes from remote sellers with more than $1 million in gross receipts.

But it takes effect only if state governments sufficiently simplify their notoriously labyrinthine tax laws. In New Jersey, for instance, bottled water and cookies are exempt from sales tax (PDF), but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but a mink fur coat is not (PDF).

The Enzi-Durbin amendment takes a similar approach, but lacks mandatory simplification and is non-binding. It appears to be intended as a clever political hack: secure plenty of votes on a non-binding Internet tax amendment, then use those vote totals to argue there's sufficient support for S.336 when it's up for a binding vote later.

"The strategy of the bill's supporters is to offer this general amendment and then claim that all the senators that vote for it support the bill," says Brian Bieron, eBay's senior director for federal government relations and global public policy. "That is not just a stretch, it is not accurate. But the game plan is to rack up a sizable vote and then make the claim the bill itself should jump over the Finance Committee and go right to the floor." (Sen. Max Baucus, D-Mont., head of the Senate Finance committee who represents a state with no sales tax, has been less than enthusiastic about S.336.)

A spokesman for Enzi did not respond to queries from CNET yesterday afternoon. Durbin has previously said that enacting the Internet tax legislation is "a matter of basic economic fairness."

Enzi's allies, including big box retailers and Sens. Dianne Feinstein (D-Calif.), Al Franken (D-Minn.), Lamar Alexander (R-Tenn.), and Heidi Heitkamp (D-S.D.), hope that they can convince 60 senators to vote for the amendment -- a key supermajority that would ease the path for enacting S.336 in the future.

A letter (PDF) that the Retail Industry Leaders Association sent to all senators on Tuesday says the Enzi-Durbin amendment "simply provides states with the authority -- if they so choose -- to require online sellers to collect sales taxes just like brick and mortar and many of their dot.com Web sites already do today." RILA's board members include representatives of Best Buy, Home Depot, Walmart, Whole Foods, Target, and AutoZone.

The current legal and political landscape was shaped by a 1992 case called Quill v. North Dakota, in which the U.S. Supreme Court ruled that out-of-state retailers generally don't have to collect sales taxes.

One exception to that rule is a legal concept called "nexus," which means a company can be forced to collect sales taxes if it has a sufficient business presence, which is why Amazon.com wasn't required to collect sales taxes in California until recently. Another exception is the sale of cigarettes, which is covered by the Jenkins Act.

As a practical matter, many Americans already pay sales taxes on Internet purchases, either from big box retailers' Web sites or from online retailers like Amazon.com that have generated nexus by opening warehouses or subsidiaries in more states. Smaller retailers, including Newegg.com, Overstock.com, Blue Nile, Systemax's TigerDirect.com, and eBay sellers are less likely to have nexus, meaning their purchases would arrive tax-free (use taxes, however, may still apply).

Supporters of Internet tax legislation say they're optimistic. "It's bound to happen," says Schatz, from the National Retail Federation. "It's just a matter of when."