Senate moves ahead on online sales tax — but would it help or handicap small businesses?

The Senate on Monday moved forward on legislation giving states more authority to collect sales tax on transactions made over the Internet, which would level the playing field for online and offline businesses — but it could also pose major challenges for small merchants who sell across the state lines.

The Marketplace Fairness Act would allow states to tax retailers from outside their borders that sell goods to their residents. Right now, that is only permitted if the retailers themselves have an actual presence in the state.

The Senate approved the measure in a preliminary vote 74-20 on Monday, but the proposal may be a tough sell to House Republicans.

The change would deliver an an additional $11 billion in tax revenue to state and local governments across the country, but many proponents say they are more interested in the potential to finally level the tax burden for brick-and-mortar and Internet-based merchants. The current system, they argue, puts retailers who sell goods in stores at a disadvantage to those who sell online, the latter of which can often avoid tacking on sales tax.

“We have heard overwhelmingly from governors, mayors and the business community on the need for federal legislation to level the playing field for our businesses and address sales tax fairness,” White House Press Secretary Jim Carney said on Monday, noting that President Obama supports the legislation.

But the proposal has its fair share of critics, too. Small business groups and anti-tax conservatives warn that online merchants would face a nearly impossible task of tracking and charging the appropriate sales tax rates for customers who live in any number of the country’s roughly 9,600 state and local taxing jurisdictions.

Related: The highest and lowest sales tax rates in the United States

“While traditional retailers claim this requirement creates more fairness in the marketplace, the reality is that the requirement does the opposite, imposing an unfair burden on smaller online retailers who would have a more difficult time complying with different sales tax rates from around the United States,” Ryan Riebe, a frequent blogger for conservative nonprofit FreedomWorks in Washington, wrote recently about the bill.

The Marketplace Fairness Act, as it currently stands, would exempt firms with less than $1 million in annual revenue from the new tax responsibilities. But some say that threshold is too low.

“If Congress passes online sales tax legislation, we believe small businesses with less than 50 employees or less than $10 million in annual out-of-state sales should be exempt from the burden of collecting sales taxes nationwide,” John Donahoe, president of online sales behemoth eBay, wrote in an e-mail campaign over the weekend. “To put that in perspective, Amazon does more than $10 million of sales every 90 minutes.”

Related: Join the conversation: What’s your take on the online sales tax bill?

A longtime benefactor of the current tax exemptions, eBay is hoping small business owners will join its opposition to the online sales tax legislation — though the company has faced some negative backlash from some small merchants, one of whom called the move “dishonest.”

The Senate is expected to vote on the measure on Wednesday. If it passes into law, here is a look at the type of variation between states that online merchants would have to account for when determining sales tax.

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J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he manages the Post's On Small Business blog.
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