My colleague Jia Lynn Yang has an excellent rundown of the battle over this bill in the Senate. But here's a primer on the key parts of the legislation.
What's the current Internet sales tax situation? Right now, state and local taxes are technically due on most things we buy online. If an item would be taxable in a local store, then it's taxable when you buy it online.
But in practice, very few people actually pay online sales taxes. And there's a reason. Thanks to a 1992 Supreme Court ruling, Internet and catalog retailers don't have to charge local sales taxes to a customer so long as they don't have a "physical presence" in the customer's state. Buyers are supposed to just pay the tax directly to the state. And that rarely happens. (Raise your hand if you even realized this was required.) In California, residents paid only 1.4 percent of online "use tax" owed in 2011.
Not only that, but brick-and-mortar stores have complained that large online sellers like Amazon and Overstock have an unfair advantage by not having to charge sales tax. "Sales taxes typically range from 5 to 10 percent, so local businesses start out at a 5 to 10 percent price disadvantage compared to Internet retailers that don’t collect taxes," writes Michael Mazerov of the Center on Budget and Policy Priorities.
Have states tried to reform this situation? Yes. A variety of states have tried to enact "Amazon laws" forcing retailers either to collect tax or to notify customers of the requirement to buy tax. But as Alan Viard of the American Enterprise Institute explains here, it's not clear these laws are constitutional and they've been challenged in court. What's more, the patchwork of state laws is confusing. That's why the Senate is stepping in.
Okay, so what would the Senate bill do? The Marketplace Fairness Act, as it's called, would allow states and local governments to require large Internet retailers and other "remote sellers" with sales over $1 million annually to collect sales taxes and send the revenue to the appropriate location.
But this wouldn't be automatic. The states would first have to pay for software that makes collection easier. States and localities would also need to simplify their tax system to make things easier for retailers — they'd have to have a single tax agency, a single tax return, and a single audit before they could require online retailers to collect.
What are the arguments for the bill? CBPP's Michael Mazerov sums up the main case in favor here: The bill would flatten the playing field between online retailers and local stores. It would allow states to recoup a few billion in taxes that are currently owed and go uncollected. And it would make tax collections slightly more progressive, since poorer Americans are less likely to shop online.
What are the objections against it? Many of the complaints stem from the fact that online retailers would have to face the hassle of collecting taxes. Here's the Wall Street Journal editorial page: "For the first time, online merchants would be forced to collect sales taxes for all of America's estimated 9,600 state and local taxing authorities."
Another argument against the bill is that it favors larger companies like Walmart that can more easily collect taxes online and squeeze out smaller competitors.
In response, some online retailers asked that the threshold for collecting sales tax be pushed higher. EBay, for instance, has argued that only businesses with at least $10 million in annual out-of-state sales or more than 50 employees should qualify for the sales tax.
What does Amazon think? Amazon's actually in favor of the bill. That may sound odd, but there are two reasons for that: For one, the company is big enough that collecting these sales taxes will be more of a burden to its smaller competitors. Second, Amazon has been moving to same-day shipping and is setting up physical warehouses in just about every state — so, increasingly, it's already required to collect sales tax under existing rules anyway.
Could the bill have unexpected side effects? Maybe. The Securities Industry and Financial Markets Association is worried that the bill could set a precedent that would allow states to collect taxes on other out-of-state activities, including legal or financial services.
Is this bill constitutional? Alan Viard of the American Enterprise Institute wrote a long essay back in 2012 arguing that a federal bill is more viable than the current patchwork of state laws. Here's the bottom line: "Requiring sellers without physical presence in a state to collect use tax is neither an extraterritorial application of state authority nor a form of tax discrimination against interstate commerce."
Is the bill likely to pass? The odds look decent. A similar bill was attached as an amendment to the Senate budget resolution and passed on a 75-24 vote in late March. That suggests it has enough votes to overcome a filibuster.