Senate Bill Would Clear Way for Online Sales Tax

State governments would be able to collect online sales taxes under a bill due to be introduced in the Senate on Wednesday, said sources familiar with the bill.

Supporters of the online sales tax collection requirement include Walmart Stores Inc, Target Corp and other big box retailers who argue they are at a disadvantage against online-only competitors.

A bipartisan group of up to seven senators will introduce the bill, which is broader than similar legislation introduced in the Senate in July. The new bill will differ from a bill in the House of Representatives by affecting more small businesses under a lower exemption threshold, the sources said.

State and local governments support Wednesday's bill. Retailers have been exempted from collecting taxes on sales in states where they do not have a physical presence dating back to a 1992 U.S. Supreme Court case -- before the advent of e-commerce.

Backers of the news bill say state and local governments will lose $24 billion in uncollected sales taxes in 2012. States have worked for more than a decade to streamline rules and get congressional approval to collect the taxes.

Backers hope the online tax bill will get swept up in bipartisan support for a bill that would eliminate the 3 percent withholding on payments to government contractors. That bill already passed the House and is expected to pass in the Democrat-led Senate later this week.

'LEVELS THE PLAYING FIELD'

The storefront retailers industry strongly stands by the legislation being introduced because it levels the playing field, said Danny Diaz, a spokesperson for the Alliance for Main Street Fairness, which represents many large retail chain stores such as Walmart.

Opponents of the Senate legislation say it does not go far enough to protect small businesses. The bill is expected to include an exemption for businesses with less than $500,000 in annual sales.

That exemption for small businesses is way too low, said Carl Szabo, policy counsel for NetChoice, which represents, AOL Inc, eBay Inc, Yahoo Inc and other Internet companies.

The House version has a $1 million exemption for small businesses that is still too low, Szabo said.

Complying with sales tax collection rules, which vary in cities and counties across the country, will add costs to businesses, Sazabo said.

It's really almost unfair for small businesses to calculate 9,600 different jurisdictions, he said. This is not the silver bullet that is going to solve the states' financial problem.

Republican sponsors are expected to be senators Lamar Alexander, Mike Enzi, Roy Blunt and John Boozman. Democrats backing it include senators Richard Durbin, who sponsored similar legislation this summer, Tim Johnson and Jack Reed. The Obama administration is also expected to endorse this bill, a source said.

Other members of Congress are fighting against the bill. Last week, Senate Democrat Ron Wyden and Republican Kelly Ayotte introduced a resolution calling on Congress not to enact legislation that would authorize state governments to collect online sales taxes. A similar resolution was introduced in the House in February.

(Additional reporting by Nanette Byrnes; editing by Howard Goller and Andre Grenon)