State governments would be able to collect online sales taxes under a bill due to be introduced in the Senate on Wednesday, said sources familiar with the bill.

Supporters of the online sales tax collection requirement include Wal-Mart Stores Inc, Target Corp and other big box retailers who argue they are at a disadvantage against online-only competitors.

A bipartisan group of up to seven senators will introduce the bill, which is broader than similar legislation introduced in the Senate in July. The new bill will differ from a bill in the House of Representatives by affecting more small businesses under a lower exemption threshold, the sources said.

State and local governments support the upcoming bill even more than earlier measures.

Retailers have been exempted from collecting taxes on sales in states where they do not have a physical presence since a 1992 Supreme Court case -- before the advent of e-commerce.

Backers of the new bill say state and local governments will lose $24 billion in uncollected sales taxes in 2012 without the power to tax Web transactions. States have worked for more than a decade to streamline rules and get congressional approval to collect the taxes.

Backers hope the online tax bill will get swept up in bipartisan support for a bill that would eliminate the 3 percent withholding on payments to government contractors.

That bill already passed the House and is expected to pass in the Democrat-led Senate later this week.

Supporters hope the Joint Select Committee on Deficit Reduction, known as the super committee, will add the sales tax proposal to its recommendations due later this month.


The storefront retail industry strongly stands by the legislation being introduced because it levels the playing field, said Danny Diaz, a spokesman for the Alliance for Main Street Fairness, which represents many large retail chain stores, such as Wal-Mart.

Opponents of the Senate legislation say it does not go far enough to protect small businesses. The bill is expected to include an exemption for businesses with less than $500,000 in annual sales.

That exemption for small businesses is way too low, said Carl Szabo, policy counsel for NetChoice, which represents, AOL Inc, eBay Inc, Yahoo Inc and other Internet companies.

The House version has a $1 million exemption for small businesses that is still too low, Szabo said.

The small business exemption should be as high as $20 million, said Jonathan Johnson, president of Inc..

The big box retailers want the small business exemption as low as possible to keep competitors from growing up and competing against them, Johnson said in an interview on Tuesday.

The federal legislation should spare businesses from lawsuits that might arise if they incorrectly collect the wrong amount of sales tax, Johnson said.

Additionally, businesses should get a small share of the tax revenue to cover their compliance costs, he said.


Congress shouldn't burden businesses with costs that should be borne by the state, he said. If we are being asked to do the states' work for them, we should be compensated.

Republican sponsors are expected to be Senators Lamar Alexander, Mike Enzi, Roy Blunt and John Boozman.

Democrats backing it include Senators Richard Durbin, who sponsored similar legislation this summer, Tim Johnson and Jack Reed. The Obama administration is also expected to endorse this bill, a source said.

Other members of Congress are fighting against the bill. Last week, Senate Democrat Ron Wyden and Republican Kelly Ayotte introduced a resolution calling on Congress not to enact legislation that would authorize state governments to collect online sales taxes. A similar resolution was introduced in the House in February.

(Additional reporting by Nanette Byrnes; Editing by Gary Hill)