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Outlook for online state sales tax fix dims in U.S. Congress

A zoomed image of a computer monitor shows a website selling button clipart for online shops in Vienna November 27, 2013. REUTERS/Heinz-Pete
A zoomed image of a computer monitor shows a website selling button clipart for online shops in Vienna November 27, 2013. REUTERS/Heinz-Pete

By Patrick Temple-West

WASHINGTON (Reuters) - Prospects for federal action to resolve a fight over state sales taxation of online retailing faded on Wednesday in the U.S. Congress, after a senior Republican lawmaker said more debate is needed before legislation can move forward.

The comments by Robert Goodlatte, chairman of the House of Representatives Judiciary Committee reduced the likelihood that the House might support a Senate bill that would empower states to collect sales tax on Internet purchases.

The issue has been unsettled for years, with brick-and-mortar retailers, including those with big Internet businesses, saying it is unfair that they must collect state sales tax on their customers' purchases, while many shoppers who buy from strictly online retailers pay no sales tax. The difference gives a pricing edge to businesses that exist almost entirely online.

State governments have said they lose $23 billion a year in uncollected sales taxes.

The Senate approved a bill in May that would require most e-commerce businesses to collect state sales taxes.

But the Senate bill "suffers from fundamental defects," Goodlatte said, worrying that online businesses could be targeted by state auditors and aggressive state tax agents.

Goodlatte gave no indication of when the House Judiciary Committee would mark up its own version of online sales tax legislation.

Amazon.com Inc, the world's largest online retailer, has a big stake in the fight. Over the years, Amazon has resisted states' efforts to make it collect sales tax on consumer purchases, though it does so now in 20 states.

Internet businesses do not need to collect a state's sales tax unless they operate a store, warehouse or have any physical presence on the ground in a given state.

Under present law, people who make online purchases in which the seller does not include state sales tax are supposed to pay state sales tax on their own, but almost no one does -- or even knows about it.

Twelve states have their own Internet sales tax laws today, up from just three in 2009, according to the Tax Foundation, a pro-business think tank in Washington.

The patchwork of state laws complicates doing business online, and Amazon now favors a federal solution, along with big-box retailers such as Wal-Mart Stores Inc, as well as state governments that stand to gain additional revenue.

"The days of tax-free Internet shopping are gradually coming to an end," said Guggenheim Securities analyst Chris Krueger, though he predicted only a 30 percent chance that Congress will intervene with federal legislation this year.

The Senate legislation was opposed by online companies, ranging from small online startups to eBay Inc.

The Judiciary Committee's top Democrat, John Conyers, said he wants to move faster on passing an online sales tax bill this year. "We should not delay any further," he said.

(Editing by Kevin Drawbaugh and Leslie Adler)

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