Online sales tax bill seen stalling in Republican-led U.S. House

Mon May 6, 2013 2:58pm EDT

* Senate approval of measure expected on Monday

* Broad tax overhaul effort moving separately

WASHINGTON May 6 (Reuters) - The U.S. Senate was expected to vote on Monday to give states the power to enforce their sales tax laws on online purchases, but the legislation was likely to stall in the Republican-controlled House of Representatives.

Many House Republicans will oppose the measure as a tax increase. House Speaker John Boehner plans to send the bill to the House Judiciary Committee, a senior Republican aide said.

That could mean time-consuming hearings ahead. The Senate uncharacteristically by-passed this step.

Judiciary Committee Chairman Robert Goodlatte, a Republican, has reservations about the legislation, including its complexity and potential impact on small businesses, a spokeswoman said.

Goodlatte has no plans yet for a hearing on it, she said.

Backers of the measure include major traditional retailers Wal-Mart Stores Inc and Best Buy Co Inc, as well as e-tailing giant Amazon.com Inc, which wants to simplify its U.S. state sales tax payments. Cash-strapped state governments are also strong supporters of the bill.

Opponents include many other online merchants such as eBay Inc and anti-tax activist Grover Norquist.

The bipartisan proposal cleared a Senate procedural hurdle last month, after 63 members in the 100-seat Senate backed it.

States that charge sales tax have largely been unable to require e-tailers to collect it from purchasers unless the e-tailer had a physical presence in the state. Otherwise, consumers are supposed to pay the tax, but very few do. Some states have made separate arrangements with Amazon on the issue, while others have not.

The bill would let states require out-of-state retailers to collect sales tax on purchases made over the Internet, even if the e-tailer has no physical presence in the purchaser's state.

The bill would allow states to do this but not require them to do so. It would also exempt merchants with online annual out-of-state sales of $1 million or less.

"We place a 30 percent probability that the bill is signed into law by the end of the year" primarily due to opposition in the House, said Guggenheim Securities analyst Chris Krueger.

"Our odds will increase following passage of this bill in the Senate provided it receives a big vote of support," he said.

POLICY OPTION REPORT

The online sales tax bill debate is moving on a separate track from efforts in Congress on a broader tax overhaul.

The main obstacle on that front remains the dispute between Republicans who refuse to consider new federal revenue from ending tax breaks that would be part of tax reform, and Democrats who insist that such new revenue is vital.

Despite this divide, Representative Dave Camp, the Republican chairman of the tax-writing House Ways and Means Committee, has vowed to move a bill forward this year.

On Monday, the Joint Committee on Taxation - a non-partisan tax research arm of Congress - is expected to release a report that will spell out options for the top-to-bottom tax code revamp that is envisioned by Camp.

The Michigan lawmaker has divided the Ways and Means committee members into groups to study tax topics ranging from real estate to financial products.

The U.S. government has not thoroughly refashioned the nation's tax system since 1986, despite wide, bipartisan agreement that the code has become encrusted with scores of deductions and other special interest tax breaks.

"If it was easy, it would have been done a long time ago," said Dorothy Coleman, a tax lobbyist for the National Association of Manufacturers, which represents 11,000 companies.

FOREIGN PROFITS

Many businesses are lobbying Congress for a cut in the 35 percent corporate income tax, while pushing at the same time for preservation of special-interest tax breaks that spare a great number of them from having to pay that top rate.

Some businesses are seeking a new law that would let them bring foreign profits into the United States with little or no tax due. Other companies have pushed for a one-time "tax holiday" to do the same thing.

As much as $2 trillion in foreign profits is now parked offshore by U.S. corporations avoiding the U.S. corporate income tax, which only applies to foreign profits when they are brought into the United States, or repatriated.

Technology giant Apple Inc's sale last week of $17 billion of bonds, the largest-ever corporate issue, was seen by some as motivated by tax concerns. The bond proceeds will allow Apple to buy back shares and pay dividends without incurring the tax hit it would take on repatriating cash held abroad.

Borrowing that kind of money, rather than bringing cash on hand into the country, is "proof positive that we've got a system that's completely wacko," said veteran tax lobbyist Ken Kies, managing director of the Federal Policy Group, a Washington tax advisory firm.

Still, most Democrats oppose a tax holiday on overseas profits, citing studies that show during an earlier such tax holiday, most of the profits brought into the country from abroad were not used for hiring or capital investment.

A spokesman for Senator Charles Schumer denied a story in the New York Post last week that suggested the New York Democrat was floating the idea of a repatriation tax holiday in exchange for a bank to fund infrastructure projects.

"He's busy with guns and immigration reform right now, so while it's possible he revisits the idea in the future, he's not doing anything on it right now," said Democratic Policy and Communications Center spokesman Matt House.

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