Senate Passes Online Sales Tax Bill, 69-27

WASHINGTON, D.C.—The Senate voted 69-27 today in favor of S. 743, the Marketplace Fairness Act of 2013—aka the online sales tax bill—which authorizes all states to collect taxes on so-called remote sales, defined by the Act as “a sale into a State in which the seller would not legally be required to pay, collect, or remit State or local sales and use taxes unless provided by this Act.” Remote sellers are defined simply as people “who make remote sales in the State,” and are exempt if the amount of all of their remote sales within the U.S. was less than $1 million in the preceeding calendar year.

Today's vote was considered a formality, as it comes less than a month after the Senate voted 75-24 in March in support of the Marketplace Fairness Act.

Claiming that the bill will finally level the nation's playing field for all retailers, senators in support took to the floor early this afternoon for a few hours of procedural debate with opponents of the legislation, who complain that the bill is being rammed through the senate (by legislators supporting “big business”) without sufficient debate or the ability to vote on amendments, and argued that its passage will harm small internet-based businesses by forcing them to expend time and resources they cannot afford to collect the taxes.

Supporters said the taxes are already due and made the same harm argument, though on behalf of small brick-and-mortar busineses they say cannot compete against online retailers able to skirt the collection of taxes owed in other states, and retorted that there had been plenty of opportunities to amend the bill in committee. They also argue that the bill contains provisions that ensure a streamlined process for collection of the taxes in order to avoid a scenario in which remote sellers have to endure multiple audits by multiple sources with the 50 states. The bill's solution is to require:

- "a single entity within the State responsible for all State and local sales and use tax administration, return processing, and audits for remote sales sourced to the State;

- "a single audit of a remote seller for all State and local taxing jurisdictions within that State;

- "and a single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration." 

Despite the lopsided victory, a far more contentious debate on the issue is brewing in the House, where, according to The Hill, “House Judiciary Committee Chairman Bob Goodlatte (R-Va.), has outlined a host of concerns about the measure.”

One area of contention today was over the question of the bill’s potential impact on small online businesses. Ted Cruz (R-Texas) argued that this “tax on the internet” would set a terrible precedent and put many small internet-based companies out of business. Sen. Dick Durbin (D-ILL) countered that 98 percent of all online business would be exempt under the Small Seller Exception, which states, “A State is authorized to require a remote seller to collect sales and use taxes under this Act only if the remote seller has gross annual receipts in total remote sales in the United States in the preceding calendar year exceeding $1,000,000.” [Italics added]

There are also, however, certain provisions in the bill that allow for aggregation of “persons with 1 or more ownership relationships” if the relationships “were designed with a principal purpose of avoiding the application of these rules.”

Today’s vote has been 20 years in the making, said Senator Durbin, who was quick to point out the multi-decade effort by the bill’s main sponsor, Sen. Mike Enzi, (R-WY) to get the law passed. While state governors from both parties have been lobbying Washington for many years to collect taxes they are already owed, countering forces always prevented it from being seriously considered.

According to the Washington Post, which augured the bill’s passage, “The issue is getting bigger for states as more people make purchases online. Last year, Internet sales in the U.S. totaled $226 billion, up nearly 16 percent from the previous year, according to Commerce Department estimates.”

In addition to online remote sales of adult novelties—a not insignificant market by any stretch—the bill could also impact the adult industry by taxing digital downloads. An article today by CNET's Declan McCullogh warns that today's action is a vote to "levy new taxes on mobile app developers, cloud computing services, music and movie downloads, and even people selling collections of WordPress themes" In fact, the bill leaves to the states the decision which products and services to tax, but as McCullagh notes, the 24 states that currently tax digital goods in-state will surely want that money from the other states.

"In an unusual twist," he also observes, "companies in the tech centers of California, New York, Maryland, Massachusetts, and Illinois, will be the hardest-hit if S.743, also known as the Marketplace Fairness Act, is enacted. That's because those states treat digital goods as non-taxable, meaning startups, individuals, or companies with offices only in those states don't need to worry about collecting sales tax." They will if it becomes law. 

Of course, the House may yet tinker with the language of the bill, including by raising the exemption threshold. Companion legislation has been introduced in the House by Reps. Steve Womack (R-Ark.), Jackie Speier (D-Calif.), Peter Welch (D-Vt.) and John Conyers Jr. (D-Mich.), but it still has to go through the committee process, reported The Hill.