Two decades after the Supreme Court ruled that states are not allowed to tax online retailers if they don’t have a physical presence in the state, an online sales tax law is finally gaining momentum in Congress.

“I think the bottom line is simply this,” Rep. John Conyers, D-Mich., said Tuesday morning at a House Judiciary hearing focused on the Marketplace Equity Act of 2011. “Tax-free sales on the Internet may be coming to an end. This could mean a very large boost in revenue. I think it would help the economy and probably also help create more jobs.”

Rep. Howard Coble, R-N.C., another supporter of the bill, said: “We may be standing in the shadow of being close to a resolution.”

The Marketplace Equity Act, HR 3179, was introduced by Rep. Steve Womack, R-Ark., and Rep. Jackie Speier, D-Calif., last fall. The bill, which has 48 Republican and Democratic co-sponsors, would authorize states to require all retailers making remote sales to collect and remit sales and use taxes without regard to the location of the seller. Retailers currently pay taxes only to states where they have a physical presence.

The proposed legislation would also exempt businesses with national sales of less than $1 million. “Any bill to enable sales tax collection from remote vendors should contain a robust small-seller exception,” House Judiciary Committee chairman Rep. Lamar Smith, R-Texas, said in his opening statement. “This way America’s job-creating small businesses do not become mere tax collection agencies for those 45 states with a sales tax.”

The 1992 court ruling in Quill Corp. v. North Dakota ruled that states can only require an out-of-state seller to collect taxes on residents if the seller has a physical presence in the state. The court worried Internet retailers would become subject to differing state tax regimes.

“This bill levels the playing field in the world of retail sales,” Womack told the committee. “It is time this loophole is closed. With simple legislation, we can finally address an issue that has been 20-plus years in the making. I plead with this committee to give favorable support to bringing this bill to the floor.”

Proponents of the bill, including Tennessee Gov. Bill Haslam, emphasized a familiar argument Tuesday that the measure addressed a fairness issue between brick-and-mortar companies and online stores. Haslam, Womack and other witnesses also stressed that the bill was not a new tax.

“Let me be clear — I am a Republican governor that does not believe in increasing taxes,” Haslam said during the hearing. “This discussion isn’t about raising taxes or adding new taxes. This is about states having the flexibility and authority to collect taxes that are alreaady owed by their own in-state residents.”

Haslam said more than $400 million in annual online sales taxes goes uncollected in Tennessee. The National Conference of State Legislatures estimates states will lose $23.3 billion this year by not being able to collect sales taxes from online and catalog purchases.

State sales tax receipts have not kept up with the rise of online retail sales. The Commerce Department found that online retail sales have increased 30% to $224 billion over the past eight years, and they are expected to almost triple again over the next eight years to more than $600 million, overtaking sales at brick-and-mortar stores, Speier noted in her testimony.

“This is clearly not a business model in its infancy,” she said. “This is an issue of collection and fairness. As online sales grow, the financial hit to our communities gets more severe. Each sales tax dollar not collected is a service not provided and a possible job lost.”

Some critics of the bill said it would impose a new tax and create additional burdens for online retailers because it would be too complicated to track sales tax laws across 9,600 jurisdictions in the U.S. Some witnesses challenged whether the bill would be feasible to impose.

Steve DelBianco, executive director of NetChoice, an organization that includes Overstock.com, eBay Inc. and Oracle Corp., said the tax burdens are not justified by the anticipated revenue because the potential sales tax on all consumer e-commerce is well below 1% of total state and local tax revenue.

Several lawmakers questioned what the states would do with the additional revenue from an online sales tax bill. Rep. Tim Griffin, R-Ark., said he supports the bill because he wants to see a level playing field among online retailers and brick-and-mortar businesses. However, he called on governors, state representatives and senators to tell constituents exactly what the revenue would be used for.

Griffin suggested that the money should be used to reduce taxes commensurate with the additional revenue that is collected. “That way you get fairness between the Internet and bricks-and-mortar and you are not raising the tax burden,” he said. 

Even though there is overwhelming bipartisan support from states to pass an online sales tax law, some GOP lawmakers are hesitant. Rep. Elton Gallegly, R-Calif., echoed the party’s concern. “I am having a little problem with the governor’s assessment of it not being a new tax,” he said. “When you have to pass a law to tax somebody, a tax they are not paying, to me that seems as though it is a new tax.”

Although members of both parties on the Judiciary Committee are pressing for the bill be brought to the House floor for a vote, it’s unlikely to happen before the November elections.

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