With strong support from both Democrats and Republicans, the Senate on Monday came one step closer to empowering state governments to collect Internet sales taxes from businesses headquartered outside of their respective state borders.
By a vote of 74 to 20, the Senate voted to start debate on the Marketplace Fairness Act on Monday. The Senate could vote on final passage of the bill this week, most likely Wednesday. That would send the bill to the House, where it may find more opposition.
Support for the legislation hasn't fallen along the usual partisan divide. It was introduced by Sen. Mike Enzi, R-Wy., while its co-sponsors include conservatives like Sen. Lindsey Graham, R-S.C., and liberals like Elizabeth Warren, D-Mass.
Backers of the bill argue that out-of-state online retailers have an unfair advantage over brick-and-mortar stores, since they're not required to collect the sales tax owed on the products they sell -- even if the state requests it. The National Conference of State Legislatures estimates states in 2012 lost more than $11 billion in sales tax revenue from online retailers based in other states. That money could make a huge difference in state budgets, especially as the economy continues to sputter back to life at a slow pace.
White House spokesman Jay Carney said Monday that President Obama supports the bill because it "puts local, neighborhood and neighborhood-based small businesses at a disadvantage to big, out-of-state, online companies. And because these out-of-state companies are able to cut corners and play by a different set of rules, the cities and states lose out on funding for K-12 education, police and fire protection, access to affordable health care, and funding for roads and bridges."
The bill would exempt companies with less than $1 million in out-of-state revenue. It also attempts to make state tax laws more uniform, so they're easier for retailers to comply with.
Enzi pointed out on the Senate floor last month that the legislation only gives states the choice of enforcing their already-existing tax laws -- it doesn't create any new streams of government revenue. If states are unable to collect taxes from online sales, they'll have to put even more taxes on the books to make up for the losses, he argued.
Some of the bill's biggest detractors come from states that don't collect sales taxes, like New Hampshire and Montana. "Montana businesses are not responsible for paying for the services and spending priorities in other states," Sen. Max Baucus, D-Mont., said on the Senate floor last month. "Montana businesses are not responsible for paying for fancy software to play tax collector for other states."
Sen. Ron Wyden, D-Ore., argued on the Senate floor Monday that the bill would "hobble the Internet economy and strain online commerce" at a time when Congress should promote innovation and entrepreneurial risk-taking.
The bill's opponents are also concerned, as Wyden said Monday that it would set a dangerous precedent.
Seven senators -- Sens. Kelly Ayotte, R-N.H.; Jon Tester, D-Mont.; Jeanne Shaheen, D-N.H.; Marco Rubio, R-Fla.; Mike Lee, R-Utah; Ted Cruz, R-Texas; and Wyden -- sent a letter to Senate Majority Leader Harry Reid, D-Nev., on Monday to complain, among other things, that the bill undermines the limits of the Commerce Clause: "Under current Supreme Court precedent, in the absence of a sufficient nexus, a state cannot reach beyond its borders to compel out-of-state Internet vendors to collect taxes on a particular transaction," they wrote.
Setting that precedent would take the nation down a "dangerous path," Wyden argued on the Senate floor. Once states could enforce tax laws in other states, what's to stop other government bodies from enforcing other rules across their boundaries, he asked, such as "China telling American firms to enforce China's censorship practices."