Consumers in California already have to pay state taxes on Internet purchases but the legislature would force approximately 200 e-retailers, including Amazon and Overstock, to tax all customers across the nation.
Under current law, Internet retailers have to charge sales tax only in states where they have a significant physical presence like a warehouse or a store.
The new legislation known as the Marketplace Fairness Act would force out of state retailers to charge state and local sales tax. The sales taxes would be sent to the states where shoppers live.
Supporters say the bill is about fairness for businesses and lsot revenue for states. Opponents say it would impose complicated regulations on retailers and doesn't have enough protections for small businesses.
EBay is fighting the bill and says the idea could potentially put small online businesses out of business. Amazon, on the other hand, supports the bill. In fact, the company wrote a letter to senators thanking them for introducing the bill.
One of the reasons Amazon may be in support of the bill is because collecting state and local sales tax all around the nation would require quite a bit of work. Because sales tax varies from state to state, it would be difficult for smaller online retailers to make the change. Consequently, smaller companies could be driven out of the online market which would create less competitors for large companies like Amazon.
The bill would require state governments to provide all Internet retailers free software to calculate sales tax.
Online retailers with out of state sales less than $1 million would be exempt.
The bill overwhelmingly passed a test vote in the Senate Monday. A final vote on the bill is expected at the end of the week. The bill would then need to pass to the House before it becomes law.
The Associated Press contributed to this report.