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By Paul C. Barton | Tennessean Washington Bureau

WASHINGTON - Tennessee's two Republican senators remain firmly at odds with the nation's foremost anti-tax group on the issue of Internet sales taxes, while the state's U.S. House delegation remains torn.

At the center of attention in the Senate this week has been the Marketplace Fairness Act, which would give states the right to collect sales taxes from out-of-state marketers who sell goods via the Web to in-state customers.

Many brick-and-mortar businesses say the absence of sales taxes on such transactions gives a significant price advantage to far-away firms that have no physical presence in the state.

A vote on final passage in the Senate could come soon, but the bill already has cleared some key procedural hurdles, including a filibuster threat.

Sen. Lamar Alexander, a leading sponsor of the legislation, contends the case for passage is open and shut.

"If somebody from Ohio or Illinois wants to sell in Tennessee, they need to play by the same rules everybody in Tennessee has to play by -- the governor and legislature of Tennessee ought to be able to decide that," the two-term senator said in a Senate floor speech this week.

Just as importantly, Alexander said, states should enjoy the freedom to decide for themselves how they want to treat such sales.

"If you decide you want to treat one set of businesses differently than others and one set of taxpayers differently than others, you have the right to be wrong. That is your business," he said.

Sen. Bob Corker said in a statement the bill will help forestall the need for a state income tax in Tennessee. The state loses at least $749 million a year because of its inability to apply sales taxes to Internet transactions involving out-of-state vendors, according to the National Conference of State Legislatures.

"I think most Tennesseans would agree that we're fortunate not to have a state income tax, and to help ensure that remains the case, it's important our sales tax system works," Corker said.

"This is a states' rights bill that gives states like Tennessee the ability to enforce existing state tax laws and collect sales taxes on online purchases if they choose. It also levels the playing field between local brick-and-mortar businesses, who have invested in the state and currently have to collect sales taxes, and online retailers, who are sometimes out-of-state entities and do not have to collect the Tennessee sales tax."

Gov. Bill Haslam also supports the legislation and came to Capitol Hill last year to testify on behalf of a similar bill.

Foes: Bill is tax grab

But Americans for Tax Reform, headed by anti-tax lobbyist Grover Norquist, contends the proposal is a tax grab that could open the door for other ways for states to attempt to tax businesses and individuals with no physical presence within their borders.

"This leads to only ugly places," Norquist said in an interview.

Once they have the geographic distribution of a firm's sales taxes payments, states could argue that they are entitled to a similar percentage of a firm's overall revenues.

"They do it now with jock taxes," he said, referring to some states' attempts to tax out-of-state athletes' income if they played a certain percentage of their games within their borders.

In another sign of the issue's political sensitivity, a leading lobbying group for small businesses, the National Federation of Independent Business, said it remains neutral. That's despite many supporters' claims that the bill would help level the playing field between mom-and-pop shops and firms with a well-established Internet presence, such as Amazon.com.

Also firmly opposing the bill is Rep. Marsha Blackburn, R-Brentwood.

"There is nothing fair about the Marketplace Fairness Act currently being considered by the Senate," she said in a statement.

"We don't need the federal government mandating additional taxes on Tennessee families and businesses. The American people have been taxed enough."

At least half of the state's other eight members in the House remain undecided.

For instance, Patrick Newton, aide to Republican Rep. John Duncan of Knoxville, said: "At this time, Congressman Duncan has very mixed feelings about the bill. He hates to increase taxes on anyone; but on the other hand, he hates to give an advantage to big out-of-state companies that we don't give to local small businesses."

Meanwhile, Democratic Reps. Jim Cooper of Nashville and Steve Cohen of Memphis said they were happy to co-sponsor a House version.

"This is not a new tax but the collection of an existing one, and everybody should be for that. Online retailers should follow the same rules that Middle Tennessee's small businesses do," Cooper said.

Contact Paul C. Barton

at pbarton@gannett.com.

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