By Larry Jones
December 17, 2012

In a bold move at the end of November, Senator Dick Durbin (IL), along with Senators Michael Enzi (WY) and Lamar Alexander (TN), filed a motion to add the Marketplace Fairness Act (S. 1832) to the Defense Authorization bill (S. 3254). The action was taken to get the Senate to consider the bill, which is a high priority of state and local governments. The legislation would empower state and local governments to collect $23 billion in sales taxes currently owed on Internet and mail-order sales.

Although the bill enjoys strong bipartisan support from an estimate 64 Senators, the Senate Finance Committee Chairman Max Baucus (MT) and the Ranking Member Orrin Hatch (UT) were not in favor of considering the bill immediately. Instead, they prefer waiting until next year to consider it in the context of broad comprehensive tax reform.

There is growing speculation that state and local governments will be asked to give up something in the tax reform debate in order to win approval of the Marketplace Fairness Act. The Senate Finance staff has made it clear that the committee is planning to consider limiting a number of exemptions and deductions, including tax-exempt municipal bonds, which are used to finance critical infrastructure in local communities.

If enacted, the Marketplace Fairness Act would give state and local governments the option of collecting taxes on Internet sales. It would also level the playing field between bricks and mortar and Internet merchants. Although these taxes are legally due, the 46 states and the District of Columbia that have sales taxes are forbidden under a 1992 Supreme Court decision from forcing Internet companies (and other out-of-state merchants) to collect such taxes. Instead, they depend on taxpayers to submit these taxes when they file their state income taxes. Since most taxpayers are unaware of this rule, these taxes mostly go uncollected.