Conservative anti-tax forces losing on Web

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WASHINGTON -- Legislation that would force Internet retailers to collect sales taxes from their customers has put anti-tax and small-government activists like Grover Norquist's Americans for Tax Reform and the Heritage Foundation in an unusual position: They're losing.

For years, conservative Republican lawmakers have been influenced heavily by the anti-tax activists in Washington, who have dictated outcomes and become the arbiters of what is and is not a tax increase. But on the question of Internet taxation, their voices have begun to be drowned out by the pleas of struggling retailers back home who complain that their online competitors enjoy an unfair price advantage.

Rep. Scott Rigell, R-Va., calls them "the hardworking men and women who have mortgaged their homes to buy or to rent a little brick-and-mortar shop."

And each time Mr. Norquist and others in the anti-tax lobby take a loss, they start to seem more vulnerable, Republican lawmakers acknowledge, with ramifications for the continuing fights on the deficit and the shape of the tax code.

"I have a lot of constituents saying to me, 'Grover Norquist did not elect you,'" said Rep. Steve Womack, R-Ark., the author of the Internet tax bill in the House. "Members that come to Washington and kowtow to special interests end up contributing to this very polarized government. These are tough decisions we have to make up here."

The legislation cleared its final procedural hurdle Thursday evening on a bipartisan Senate vote, 63-30. Final Senate passage is scheduled for May 6, and that tally is likely to be even more strongly in favor. Earlier test votes won as many as 75 yeses. And House action, once seemingly unthinkable, may be unstoppable.

"I have some concern about the legislation," said Rep. Bob Goodlatte of Virginia, chairman of the House Judiciary Committee, which has jurisdiction on the issue, "but we also recognize the fairness issue -- certain items being taxed in certain circumstances, other items being not -- is a problem for brick-and-mortar businesses, so we're going to try and solve that."

The Marketplace Fairness Act would allow state governments to force Internet retailers to collect sales taxes from their customers and remit the proceeds to state and local governments, just as brick-and-mortar retailers have done for decades. The states would be required to provide free software that would be embedded in retail websites to do the calculations.

Mr. Norquist, whose organization maintains the anti-tax pledge that virtually every Republican in Washington has signed, calls it the "Let People in Alabama Loot People in New York Act." To him, the bill is a money grab by strapped state and local governments that would get the power to tax consumers who do not have the power to vote them out of office.

"It reduces the pressure on governments to offer the best services at the lowest cost," he said in an interview. "We think it's a very, very bad idea."

His group has suggested that a yes would violate the taxpayers' pledge, although Mr. Norquist has been cautious about whether passage of the law would constitute a tax increase, since consumers are already supposed to pay sales taxes even if a merchant does not collect it.

The Heritage Foundation and its more overt political arm, Heritage Action, have made no such equivocations. It is making a yes vote a black mark for a lawmaker on Heritage's conservative scorecard, urging its members to call their representatives and senators, "pretty much everything we can," said Dan Holler, a spokesman for Heritage Action.

Many Republicans have just shrugged. Supporters of the bill include Tea Party conservatives like Sen. Ron Johnson, R-Wis., and Republican leaders like Sen. John Thune of South Dakota. They argue that the bill, which could generate as much as $24 billion in new tax revenues, is not a tax increase at all. It only ensures that taxes already owed are actually paid. Most states collect 4 percent to 7 percent on retail purchases.

"It's obviously an issue that can be divisive for Republicans because a lot of the anti-tax groups are weighing in against it," Mr. Thune said. "But in states like mine where you've got a lot of smaller retailers trying to compete in smaller communities, people are going to do their business online, and that has grown dramatically over the last few years."

The real pull has come from personal experiences back home, and the emergence of reliable Republican business voices who have provided a rare counterargument to the activists in Washington.

For Sen. Roy Blunt of Missouri, it is a bridal shop in St. Louis where customers try on dresses, check the labels for the product code, and then order the same product online, free of sales tax.

For opponents of the bill, the impotence of the anti-tax arguments has been a revelation.

"I don't think any one group drives an issue. It's the issue itself," said Sen. Kelly Ayotte, R-N.H., whose state is one of five with no sales taxes. "What does surprise me, put aside the groups for a minute, is that there are people who describe themselves as conservatives who are going to support this act, when regardless of how you look at it, whether your state has a sales tax or not, it's going to put some fairly rigorous and onerous requirements on online businesses to collect taxes for other states. That's counter to conservative principles."

The Internet sales tax is not the first battle such groups have lost, but it might be one of the clearest. In 2010, just before all of the Bush-era tax cuts were first set to expire, President Barack Obama and Senate Republican negotiators reached agreement to extend all of the tax cuts for two years, except one.

The estate tax had actually expired. Rather than have it reborn at the relatively high top rate of Bill Clinton's era, negotiators allowed it to come back at a considerably lower rate. It was still a tax increase from zero, but not as big as it could have been. Mr. Norquist blessed it.

He took his argument even further this year when all those tax cuts expired again. This time, Mr. Obama insisted that tax rates rise considerably on upper-income families' wages, estates, capital gains and dividends. Almost all Republicans saw that as a tax increase, and a big one, but Mr. Norquist -- seeing that passage was inevitable -- again declared that the deal did not violate his group's no-new-taxes pledge since letting all the tax cuts expire would be worse.

This time, Mr. Norquist and other conservatives are not mincing words. Heritage Action predicted that the Internet bill would usher in "tax audits from hell" for online retailers who could be subject to scrutiny from taxing authorities all over the country at year's end.

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