Online sales tax effort may get swallowed by push for larger tax reform deal

Advocates of online sales tax legislation are worried that their bill could become bogged down in the larger debate over reforming the federal tax code.

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The measure’s backers — including the No. 2 Democrat in the Senate, Dick Durbin (Ill.) – say it doesn't affect federal revenue collection and therefore there's no reason for their proposal to be wrapped up in tax reform.

But Senate Finance Committee Chairman Max Baucus (D-Mont.), whose panel has jurisdiction over the online sales tax measure, likely will want to consider it in the broader context of tax reform, a Democratic aide said.

Baucus has expressed broader concerns about the proposal, in large part because Montana is one of five states without a sales tax.

“This is separate,” Durbin said Thursday, when asked whether online sales tax should be part of the larger reform debate. “Even though the 'tax' word is involved in it, it strictly involves state and local tax revenues.”

But at the same time, advocates acknowledge that tax reform could give them the chance to tack their proposal onto a larger legislative package — and that they’d jump at that offer, if given the choice.

Given the partisan differences on Capitol Hill, lawmakers backing the bill say that attaching the online sales tax bill to a broader measure may be the proposal’s best shot anyway.

“When you’re a proponent, you’re always looking for some vehicle to carry your issue,” Rep. Peter Welch (D-Vt.), a sponsor of the sales tax proposal, said about the possibility of it entering the tax reform debate. “So sure. Theoretically it could be. But it just doesn’t have anything to do with it.”

Durbin and Welch were part of a bipartisan group of 53 House members and senators that introduced the Marketplace Fairness Act on Thursday, a measure that would empower states to tax out-of-state online purchases.

The bill would exempt small businesses that earn less than $1 million annually from out-of-state sales and melds slightly different pieces of legislation that were introduced in the last Congress.

Advocates say the measure would close an unfair loophole that benefits online retailers over local brick-and-mortar stores.

Under current law, states can only collect sales taxes from retailers that have a physical presence in their state. People who order items online from another state are supposed to declare the purchases on their tax forms, but few do.

"It's time to stop discriminating through the tax code and put local and Main Street retailers on a level playing field with their out-of-state and online counterparts," Sen. Mike Enzi (R-Wyo.), the bill's lead Senate sponsor, said at a press conference Thursday.

Prominent GOP governors — Chris Christie of New Jersey, Rick Snyder of Michigan and Bob McDonnell of Virginia, among others — have lobbied to give states more authority to collect online sales taxes.

Several of those governors are up for reelection in the next two years, which means they could put added pressure on Congress to act.

But conservatives who oppose the measure say Washington should not be looking for new ways to get more revenue out of taxpayers, and other critics have said it would be a burden to small businesses and smother online commerce.

Lawmakers from states without sales taxes have expressed concern that, under the proposed legislation, businesses they represent would be forced to play tax collector solely for other states.

“Same bad idea, same proponents, same disregard for small web businesses and the same ill-advised effort to use the Internet as a platform for taxation rather than innovation,” Phil Bond, executive director of the WE R HERE Coalition, said in a statement.

“We trust this effort — like the ones before it — will be defeated by those who favor small businesses and innovation,” he said.

David French, the top lobbyist for the National Retail Federation and a supporter of the legislation, argued that Congress should take up the bill as a stand-alone issue.

While French said he’d be thrilled to see the measure enacted as part of tax reform, he was far from confident that Congress would be able to tackle such a thorny issue.

"The question of whether tax reform can get across the finish line this year is a big one," he said. "I haven't seen anyone with a crystal ball say it is more than a 50-50 proposition."

Baucus and the top tax-writer in the House, Ways and Means Committee Chairman Dave Camp (R-Mich.), have said that a comprehensive rewrite is a top priority.

But House Speaker John Boehner (R-Ohio), at least publicly, has been less gung-ho about tax reform recently, underscoring the tense relationship between Democrats and Republicans after the recent fiscal-cliff deal raised some $600 billion in new revenues.

Democrats, meanwhile, want to find more revenue to reduce deficits, and Baucus is trying to balance that goal with his longstanding efforts at comprehensive reform.

Other backers of the online sales tax measure remain confident that their issue won't have to be bogged down in the tax reform debate.

At Thursday’s news conference, Durbin emphasized the bill's bipartisan support, which includes backing from Senate Majority Leader Harry Reid (D-Nev.).

“Senator Durbin expressed confidence that we will get it passed this year and indicated that Sen. Reid was committed to getting it done as well,” said Jason Brewer, vice president for communications and advocacy at the Retail Industry Leaders Association.

“Coupled with the fact that the bill already has broad bipartisan support, we feel very strong about movement in the Senate,” he said.

But Durbin acknowledged that he has yet to win over Baucus, who is in a position to scuttle the legislation.

Baucus has been discussing with colleagues like Durbin how an online sales tax would work among states that have very different tax rules, the Democratic aide said.

"He has some concerns. We are trying to address them," Durbin said. "It is important that we bring this matter up sooner rather than later."