The U.S. Senate voted overwhelmingly today to endorse levying Internet sales taxes on American shoppers, despite warnings from a handful of senators that the proposal is antibusiness, harmful to taxpayers, and will be a "bureaucratic nightmare."
By a vote of 75 to 24, senators adopted an amendment to a Democratic budget resolution that, by allowing states to "collect taxes on remote sales," is intended to eventually usher in the first national Internet sales tax.
The vote follows a week of fierce lobbying from the National Retail Federation and the Retail Industry Leaders Association, which represent companies including Walmart, Target, AutoZone, Best Buy, Home Depot, OfficeMax, Macy's, and the Container Store. They argue that online retailers, which in some cases do not collect sales taxes at checkout, enjoy an unfair competitive advantage over big box stores that do.
"We believe this is the fair thing to do," Sen. Dick Durbin, an Illinois Democrat, said during this afternoon's floor debate. "Otherwise they're competing against retailers who don't collect."
The amendment, drafted by Sen. Mike Enzi (R-Wy.), is nonbinding but nevertheless represents an important political milestone for Internet tax aficionados. The overwhelming vote count now likely allows them to bypass the Senate Finance committee, headed by Democratic Sen. Max Baucus from Montana, a state without a sales tax -- and representatives in Washington, D.C., who would like to keep it that way.
In Montana, Baucus said during the floor debate today, "sales tax is anathema." But, he warned, what the amendment "says is eventually you can have a sales tax in my state. So in effect we'll be forced to have a sales tax."
Montana businesses selling through the Internet or mail order to other states will have to "collect and enforce" those other states' sales taxes, Baucus said. "I've never heard this happening before.... It's a terrible precedent."
Taxpayer advocates say Enzi's amendment amounts to a multibillion dollar tax hike on American consumers that shouldn't be tucked into an unrelated budget bill (PDF). The National Taxpayers Union set up a petition to Congress this week saying Enzi's bill is "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."
"It's discouraging but not unexpected," Steve DelBianco, executive director of NetChoice, said after the vote. He said the Enzi amendment was "not even vaguely related to the underlying bill" that will be offered for a binding vote later this year, so it would be a mistake to predict the vote count would be the same.
That binding vote would come in the form of the so-called Marketplace Fairness Act of 2013 (S.336), introduced last month, which has 26 Senate cosponsors 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 labyrinthine tax laws. In New Jersey, for instance, bottled water and cookies are exempt from sales tax, but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but a mink fur coat is not.
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: "Congress is now free to decide whether, when, and to what extent the states may burden interstate mail order concerns with a duty to collect use taxes."
Under the Quill ruling, out-of-state retailers generally don't have to collect 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, especially as Internet retailers including Amazon and even Apple have opened stores or warehouses in more states. But smaller retailers, including Newegg.com, Systemax's TigerDirect.com, and eBay sellers are less likely to have nexus.
Durbin released a statement this afternoon saying the vote was on an "amendment summarizing" the Marketplace Fairness Act, and that "today's vote proves that an overwhelming majority of Senators support this bipartisan legislation."
The National Retail Federation circulated a statement after the vote saying: "The retail community is unified in our commitment to pass the Marketplace Fairness Act and make it law. NRF members will continue to educate and lobby legislators on the importance of leveling the sales tax playing field for all retailers -- no matter their preferred channel."
The National Taxpayers Union, on the other hand, responded by saying: "Lawmakers claiming to be taxpayer advocates had no business backing this amendment, which opens the door to a host of threats to taxpayers.... Polls asking the question fairly show that the more they understand (the proposal), the more stridently citizens oppose the bill. They will not walk away from this fight simply because of a cleverly engineered parliamentary maneuver."