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Online Sales Tax Bill Moves to Senate (and Amazon Supports It)

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Amazon and eBay stand on opposite sides of a hot debate over sales taxes on Internet purchases.

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Have you heard about the looming danger of a "national sales tax" on Internet retail transactions?

Don't panic. It's just a bit of hyperbole in the high-stakes debate over a bill before the US Senate this week that could eliminate the last vestiges of a competitive edge that Web retailers have enjoyed since their earliest days-that is, exemption from state sales taxes.

The Marketplace Fairness Act would allow the states to collect sales taxes on Internet purchases made by their residents, regardless of whether the seller has a physical presence in the state.

Effectively, that would mean that virtually all Internet sales would be subject to sales taxes, although an exemption is made in the bill for small retailers. A critical issue in the debate is defining "small." The bill currently excludes sellers who gross less than $1 million a year.

To understand the likely impact on consumers and business, you need to to look at it from the viewpoints of those who support it and those who oppose it. Oddly, Web retailing's iconic giants, Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) find themselves on opposite sides, for reasons that go far to clarify the issues .

The Anti View

In 2013, it is difficult to argue that those feisty little Web entrepreneurs need a break from taxes to help them build their businesses and compete against the all-powerful big-box stores.

However, opponents of the Marketplace Fairness Act argue that it swings all the way in the opposite direction, not only removing a benefit that the Internet enjoyed but saddling it with a crushing burden that no brick-and-mortar retailer need face.

Candidly, it does sound like a nightmare scenario: Online retailers would be required to calculate, collect, and remit taxes from about 46 jurisdictions (several states don't have a sales tax). And, they could be audited by any of those jurisdictions.

It gets more complicated from there. State sales tax codes tend to be stupefyingly messy, and they change constantly, with exemptions, for example, for food, including fruit juice, unless it contains less than 70% natural fruit... You get the idea.

Worse, local governments can have sales taxes, too. Opponents of the law claim there are actually 9,600 tax jurisdictions in the US, not 46.

The law includes a requirement that states must simplify their sales tax systems, and provide software to retailers, in order to collect taxes on online sales. (Yeah, that'll work.)

A coalition of 15 taxpayer advocacy groups and conservative think tanks have sent an open letter to Congress opposing the bill. They argue that it would greatly expand state tax authority by eliminating that "physical presence standard."

It took the Wall Street Journal, though, to come up with the catchy phrase that defines the proposed law as a "National Sales Tax." (Note to Journal owner Rupert Murdoch: Overkill, mate.)

A more measured tone is taken by eBay, whose CEO, John Donahoe, calls the legislation "wrong-headed and unfair" to small businesses and consumers. Over the weekend, the company called on its eBay store owners-and there are millions of them-to pressure Congress to change the bill.

Rather than outright opposing it, eBay seeks to increase the exemption for the smallest businesses from $1 million to at least $10 million.

Obviously, nobody is making $1 million a year on eBay from junk pulled out of their garages. But a writer for CNet points out that a seller grossing $1 million a year might be netting about $83,000, and that is mom-and-pop store territory.

The Pro Argument

Now, this is really wild: Amazon favors the Marketplace Fairness Act.

Amazon, which spent years fighting every state that tried to force it to collect sales taxes based on that "physical presence" rule. The company shut down regional warehouses, jettisoned small business partners, refused to hire employees who resided outside its home state. All to thwart any state that wanted it to collect sales taxes.

Then its business strategy changed significantly. For the past couple of years, Amazon has been investing heavily in new warehouses from coast to coast in order to speed delivery to its customers, giving it a different advantage over its competitors.

So, Amazon is already collecting sales taxes in many jurisdictions. Many of its "partner" stores will be covered by the exemption. It's in a good place if the bill becomes law.

Other backers of the law are more predictable. The associations that represent big-box retailers, including Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Best Buy (NYSE:BBY), have lobbied heavily for it. These retailers have always had to collect sales taxes online, because they indisputably have a physical presence in every state.

State and local governments, unsurprisingly, want this law badly. The states estimate that they lost $23 billion in taxes to online shopping in 2012. They believe that their Main Street businesses may get a lift, too, if their online competition loses that edge.

At this point, it looks like the bill has broad bipartisan support in the US Senate. If it passes, it goes to the House of Representatives, followed by an army of lobbyists arguing for and against it.

President Barack Obama has signaled that he will sign the Marketplace Fairness Act if it reaches his desk. In a press briefing Monday, Press Secretary Jay Carney said the White House supports the legislation on the grounds that it will "level the playing field" between Main Street business and their Internet competition, and bring in much-needed revenue for state and local services.

Also see:

Why You Might Be Sharing a Cubicle With Your Windows Phone

Apple's Alliance With Yahoo Makes Sense, but Don't Expect Breakup With Google
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No positions in stocks mentioned.
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