Online sales tax collections would help states manage their budget problems, but could impose heavy burdens on small online merchants, executives from Internet and brick-and-mortar businesses told a congressional committee.

During a House Judiciary Committee hearing last Wednesday, executives from Amazon.com, eBay and Overstock.com were among those testifying. Amazon, which has been fighting efforts by various states to require it to collect and remit online sales taxes from its customers, said that Congress needed to establish a nationwide system for collecting the sales taxes.

“Far from an e-commerce ‘loophole,’ the constitutional limitation on states’ authority to collect sales tax is at the core of our nation’s founding principles,” said Paul Misener, vice president for global public policy at Amazon. “For this reason, Amazon has steadfastly opposed state attempts to require out-of-state sellers to collect absent congressional authorization.”

Misener acknowledged that there should be some protections for small online merchants, but noted that a large proportion of e-commerce is conducted by small-volume sellers. “Nearly 30 percent of uncollected sales tax revenue today is attributable to sellers with annual online sales below $150,000, and only 1 percent of online sellers sell more than this amount,” said Misener. “In other words, a $150,000 exception would deny the states nearly 30 percent of the newly available (yet already owed) revenue, but would exempt from collection 99 percent of online sellers. Any higher threshold would deny the states even more revenue and keep the playing field even more un-level.”

While Amazon has been fighting various state laws, it has backed a pair of federal bills introduced in Congress this year, the Main Street Fairness Act and the Marketplace Fairness Act, which both rely upon the Streamlined Sales and Use Tax Agreement that is in use by 24 states (see Congress Introduces Bill to Collect Online Sales Taxes and Senators Introduce Online Sales Tax Bill).

On the other hand, its rival eBay has opposed both bills. Tod Cohen, vice president and deputy general counsel at eBay, said that any legislation would have to take into account small online retailers. “You hear a lot about fairness in this debate,” he said. “Some have claimed that a ‘level playing field’ means all retailers using the Internet should be held to the same remote sales tax standard. However, sameness is not fairness. Small businesses retailers face many competitive disadvantages when compared to larger retailers. They have proportionally higher costs of doing business, including providing employee benefits.” He insisted that any legislation should include a “Small Business Exemption.”

“A real Small Business Exemption would protect small retailers who are already falling behind,” said Cohen. “Permanently protecting small business retailers from national remote sales tax collection burdens will promote new retail competition.”

Patrick Byrne, the outspoken chairman and CEO of Overstock.com, opposes both pieces of legislation that have been introduced this year. “In my opinion, the pending bills allow states to shirk their responsibility to administer and collect the taxes they impose on the taxable ‘end consumer,’” he said. “Instead, they pass that burden on to non-resident, non-voting businesses. Passage of such legislation would curtail the emergence of the next innovative e-commerce company and poison the Internet’s fertile ground for growth and innovation.”

Dan Marshall, the owner of Marshall Music, a musical instrument retailer based in Lansing, Mich., argued that small businesses face an uneven playing field in competing with the large online retailers.

“Today, bricks-and-mortar stores like ours are becoming the showrooms for online-only companies like Overstock, Amazon and eBay,” he said. “Customers literally come into our stores every single day to play, touch, look at, and evaluate higher-end musical equipment, only to walk out of the store and go home to purchase the item from an online retailer that does not collect the state sales tax at the point of purchase. Retailers have always had the ability to match prices. For the professional music equipment Marshall Music sells, our customers are very sophisticated on price. Our sales associates are fully aware of online prices and we are able to match those prices for customers. Matching or beating the price of a competitor—regardless of whether it is a bricks-and-mortar store or an online shop—is part of retail. Always has been and always will be. But what I cannot do is tell the customer that I do not have to charge them the state sales tax. In fact, if I did that, I’d find myself audited, fined and potentially thrown in jail.”