WASHINGTON — Large retailers and state and local officials anxious to find new sources of revenue are renewing a push for legislation to help states collect billions of dollars in sales tax from online shoppers.

Brick-and-mortar stores, from Wal-Mart to the neighborhood craft shop, say online competitors enjoy an unfair advantage because sellers on the Internet are not required to collect sales tax in states where they do not have a business presence.

A small online retailer in California, with no office or store outside the state, must collect sales tax on transactions with California buyers, but not on sales elsewhere.

But closing that tax gap is fiercely opposed by eBay, Yahoo, the Electronic Retailing Association and small online retailers. All but five states have a sales tax, and opponents maintain that complying with the thousands of sales tax rules would cripple small business and hinder e-commerce.

Compliance would mean, for example, that a mom-and-pop business selling homemade clothing items online would have to know that a scarf is taxable in one state or locality but not another.

A coalition of businesses and state officials plans to back a bill in Congress, being drafted with the help of state legislative leaders, that would allow states that enact a simplified sales tax system to collect from all online retailers, along with mail-order and phone sellers.


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The revenue at stake is substantial. When the recession hit hard in the fourth quarter of 2008, state sales tax revenue dipped 6 percent, the largest drop in 50 years, according to the Nelson A. Rockefeller Institute of Government. In California, the drop was 16 percent.

Collecting all online sales tax revenue could generate an additional $52 billion for the states over six years, a study by three University of Tennessee professors concluded.

"That could mean over $1 billion a year for California, which would certainly help with the deficit," said Neal Osten, federal affairs counsel with the National Conference of State Legislatures. "This is fiscal relief the Congress can give the states with no cost to the federal treasury."

The bill is the result of a nine-year effort by states and traditional retailers, called the Streamlined Sales Tax Project — an attempt to agree on uniform rules for what is taxable, compensation to online retailers who comply, and liability protection for any tax errors. So far, 22 states, not including California, have agreed to simplify their tax codes and make them uniform. Proponents hope this will make the bill more palatable in Congress.

"We're trying to remove the administrative burden on sellers and make the system more uniform," said Scott Peterson, executive director of the project.

Peterson and other proponents of closing the tax "loophole" point out that in most states, very small retailers — online or not — are exempt from collecting taxes if they are under a certain threshold of sales volume, which could be $10,000 or much higher, and that would not change.

The Streamlined Sales Tax Project has the backing of the National Retail Federation and even some online retailers, such as Amazon — as long as the systems are truly simplified.

But eBay, one of the leading opponents, disputes the simplification claims and asserts that the small businesses that use eBay — and buyers — would be hurt by a new tax requirement.

"This would impose a new burden on small and medium-size enterprises, because this proposed 'streamlined' system really lacks uniform definitions," said Tod Cohen, deputy general counsel for San Jose-based eBay. "The Wal-Marts of the world can keep track of all the tax variations, but it would really hurt small sellers."

Cohen also questioned some of the revenue projections as "a mythical pot of gold at the end of the rainbow."

The size argument can be used by both sides in this debate. Rep. Bill Delahunt, D-Mass., who plans to introduce legislation soon to help states collect the tax, said small stores in downtowns everywhere have been hurt by online retailers offering lower prices because they don't have to add on sales tax.

"We're trying to be reasonable, but the bottom line is eBay, a major economic force, is opposing this because they want to maximize their profits," Delahunt said. "This is not taxing the Internet, but collecting taxes that already exist."

But that distinction may be lost on Congress. Even with the support of state leaders and many retailers, the bill faces an uphill climb.

Rep. Anna Eshoo, a Palo Alto Democrat, said she will take a hard look at the bill but said, "I am skeptical. The states have been working on this for nine years, and we will see what they come up with."

Opposing views

The coalition seeking wider sales tax collections can be found at www.streamlinedsalestax.org; trade groups and businesses in opposition can be found at www.netchoice.org.

Contact Frank Davies at fdavies@mercurynews.com or 202-662-8921.