Legislation introduced by Sens. Mike Enzi (R-WY), Dick Durbin (D-IL) and Lamar Alexander (R-TN) would allow states to collect sales taxes from online businesses that have no physical presence in the state.

Online retailers have been exempted from collecting taxes on sales in states where they do not have a physical presence thanks to a 1992 Supreme Court holding that tax systems are so complex that they represent an unreasonable burden on interstate commerce. Under the Marketplace Fairness Act, states could force online business like Amazon and Overstock.com to collect sales taxes.

The legislation exempts sellers who make less than $500,000 in total remote sales a year. States would also have simplify their tax systems before collecting sales taxes from online businesses.

The senators presented the legislation as closing a tax loophole that deprived states of revenue and leveling the playing field.

“For over a decade, Congress has been debating how to best allow states to collect sales taxes from online retailers in a way that puts Main Street businesses on a level playing field with online retailers," Enzi said.

"This bill empowers states to make the decision themselves. If they choose to collect already existing sales taxes on all purchases, regardless of whether the sale was online or in store, they can. If they want to keep things the way they are, it’s a state’s choice.”

But Internet commerce advocates claim states have little to gain from the bill.

"Online sales tax supporters are promising a Thanksgiving feast, but all they'll deliver are cold leftovers," said Steve DelBianco, executive director of NetChoice, whose members include eBay, Overstock.com, and Yahoo.

"Small online retailers are right to fear the costs and compliance burdens of this proposal."

According to research conducted by Jeffrey Eisenach, the states missed out on approximately $3.9 billion in uncollected sales tax revenues in 2008, which was less than three-tenths of one percent of state and local tax revenues.

"In essence, we're seeing some members of Congress throw one of our best growth industries under the bus to pursue less than half a penny in new taxes," said DelBianco. "Does anyone besides big-box retailers really think it's a good idea to saddle small business owners with a new tax system?"

To combat the proposal, Sen. Ron Wyden (D-OR) and Kelly Ayotte (R-NH) introduced a resolution last week stating Congress will not enact legislation that gives the states the authority to impose unfair taxation on online businesses.

"A state can force an in-state store to collect and remit sales tax because that store benefits from state services," Wyden explained. "But Virginia isn’t going to send the fire department to help out an online retailer operating out of a living room in Oregon."