Momentum builds after Amazon’s deal with California. A bipartisan group of U.S. senators introduces the Marketplace Fairness Act to let states collect sales taxes from most Internet retailers.

By Jim Puzzanghera, Los Angeles Times
November 10, 2011

Reporting from Washington— Lawmakers, looking to help cash-strapped local governments, are coalescing around legislation aimed at letting states require most online retailers and catalog-only companies to collect sales taxes from customers.

The momentum is building nearly two decades after the U.S. Supreme Court barred states from requiring out-of-state companies to collect in-state taxes on sales. But the court left the door open for Congress to allow such collection through legislation.

The new effort is being boosted by a major crack in the nearly solid wall of opposition by Internet retailers. Amazon.com Inc., the world’s largest online retailer, wants standardized federal rules in the face of new online sales tax collection laws in California and a growing number of other states.

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“If I were president of an online retailer … I would look at this week in Washington, D.C., and I’d make my plans to start collecting sales taxes wherever I sold things in the United States,” said Sen. Lamar Alexander (R-Tenn.).

On Wednesday, Alexander was part of a bipartisan group of senators — five Democrats and five Republicans — who introduced legislation aimed at leveling the playing field among online, catalog and bricks-and-mortar retailers.

The bill, called the Marketplace Fairness Act, also would enable state and local governments to collect an estimated $23 billion in tax revenue each year for online, catalog and other so-called remote sales.

“It’s about closing a tax loophole,” Alexander said.

Alexander, a former Tennessee governor, has been trying for years to overturn the court decision legislatively. He predicted that the bill would pass Congress because it is a bipartisan endeavor and is more flexible than previous efforts. The bill is similar to legislation introduced last month in the House.

The severe economic problems of many state and local governments add to the impetus to pass the legislation, which would boost revenue without creating a new tax, said Neal Osten, director of the Washington office of the National Conference of State Legislatures.

“We believe at some point Congress will say … ‘This is something we can do for the states that does not cost the federal Treasury a dime,'” said Osten, whose group has supported similar measures for years. “I think in the end, that is going to be the winning argument for Congress.”

A 1992 Supreme Court ruling prohibits states from collecting sales taxes from retailers unless they have a physical presence in the state. The ruling has exempted most online sales, and the majority in Congress for years has allowed the no-tax rule to remain partly to foster the growth of the Internet.

But as online retailing has grown over the last decade, states have been trying to solve the problem on their own by expanding the definition of physical presence to include third-party affiliates, typically in-state websites that earn commissions by providing links to Amazon and other out-of-state retailers.

For the third quarter, sales by online retailers in the U.S. grew 13% to $36.3 billion from the same quarter last year, Internet data firm ComScore Inc. said Wednesday. It was the eighth straight quarter of year-over-year growth.

Nearly four months ago, California enacted a law requiring most online retailers with affiliates in the state to collect sales tax from purchases made by state residents. Amazon, which has fought such efforts in other states, then threatened to launch a referendum battle.

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