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A proposal to tax certain online sales in Maryland has drawn the wrath of some Internet retailers and business organizations, while attracting support from Senate President Thomas V. Mike Miller Jr. and Comptroller Peter V.R. Franchot.

Sen. Richard S. Madaleno Jr. (D-Dist. 18) of Kensington said he recently filed the legislation to help plug a multimillion-dollar budget gap. The bill is similar to a 2008 New York law, and Madaleno expects the measure to raise about $7 million annually in Maryland.

Online retailers Amazon.com and Overstock.com sued New York, but the law was upheld in January by New York State Supreme Court Justice Eileen Bransten. Her ruling, which Overstock is appealing, "increased the viability of this" in Maryland, Madaleno said. "We're more desperate than we were six weeks ago," he said.

The sales tax would be collected by affiliates of Amazon and similar retailers based in Maryland that earn commissions for sending Maryland customers to those retailers through referrals, such as a banner on their Internet sites.

Amazon and Overstock executives said in court documents that their affiliate agreements are merely forms of advertising; Bransten disagreed with this, ruling that the affiliate arrangements represent taxable operations in the state.

The New York law "does not broadly tax any and all Internet sales to New York consumers," Bransten wrote. "The neutral statute simply obligates out-of-state sellers to shoulder their fair share of the tax collection burden when using New Yorkers to earn profit from other New Yorkers."

After the New York law went into effect last summer, Overstock of Salt Lake City canceled its agreements with 3,400 affiliates there. But New Yorkers still have been able to do business with Overstock, as they are simply rerouted through affiliates in other states, said Mark Griffin, general counsel for Overstock.

Besides Maryland, several other states, including California and Hawaii, are considering a similar tax, Griffin said. But some states are backing away from it after seeing that the benefits are not as great as initially thought, he said.

"It's a short-sighted approach," he said. Griffin said Overstock would "keep all of its options on the table" if Maryland enacted a similar law.

But an Amazon executive said in a letter this week that his company would cancel contracts with affiliates in Maryland if the state adopts such a tax.

The measure is "unconstitutional and would not be an effective source of revenue," Paul Misener, vice president for global public policy with the Seattle retailer, said in the letter to Sen. Ulysses Currie (D-Dist. 25) of Forestville. Currie chairs the Senate Budget and Taxation Committee, which held a hearing on the bill Thursday.

About a dozen people testified, mostly against the measure. Only Thomas Saquella of the Maryland Retailers Association backed the bill, as it would put online retailers on more of an equal footing with bricks-and-mortar retailers.

Misener cited a U.S. Supreme Court decision in 1992 that overruled a North Dakota court's decision that Quill Corp., now a division of Staples, had to collect sales taxes for purchases that North Dakota residents made. Quill did not have an office in North Dakota, but customers there used mail-order catalogs and floppy disks, which the high court ruled did not satisfy the physical presence requirement.

The Maryland law would be "unconstitutional because it ultimately would require sellers with no physical presence in Maryland to collect sales tax merely on the basis of contracts with Maryland advertisers," Misener said. Any revenue estimates by Maryland officials should take into account the lost revenue after Amazon and other retailers cut off Maryland affiliates, he said.

The bill is "constitutionally suspect" and will waste the state's resources in attempting to enforce it, said Ronald Wineholt, vice president of government affairs for the Maryland Chamber of Commerce. The chamber opposes the legislation, as do other groups, such as the Council on State Taxation of Washington, D.C., which represents about 600 major corporations engaged in interstate and international business.

A sounder approach to taxing remote sales is to move Maryland toward a streamlined sales tax system, Wineholt said. Since 2000, half of the 44 states with sales taxes have adopted the streamlined agreement to simplify and modernize sales tax administration, he said.

In exchange, companies selling products over the Internet or by mail order would be encouraged to collect sales taxes on customers, thus raising more tax revenue and leveling the playing field for Maryland retailers that sell similar products subject to the tax, according to a chamber position statement. Versions of that bill were still in committees in both Maryland chambers Thursday.

Protecting local retailers

Although Madaleno introduced the Internet sales bill, the legislation has a key driver in Miller (D-Dist. 27) of Chesapeake Beach.

"What we're doing is protecting local retail businesses at the same time as enhancing the state revenues," Miller said.

Franchot (D) said the legislation is the "Maryland version" of the New York law, and he supports both. Maryland collects sales tax from Barnes & Noble's online sales, he noted.

"That's unfair to Barnes and Noble, and it's unfair to the state," Franchot said. "It's unfair to Barnes and Noble because it gives Amazon an unfair competitive edge. It's unfair to the state of Maryland because we don't get the sales tax from the Internet sales."

It's important to get the Internet sales tax ball rolling in Maryland "because the issue is very clear," he said. If the New York law is overturned, Maryland's version can be amended, Franchot said.

As for individuals selling an old baby stroller or clothes on eBay or Craigslist, Franchot said that in theory, anyone in Maryland who sells an item to another person owes the state sales tax. But he added that his job as comptroller is to enforce the laws "with common sense."

"Obviously, I'm more interested in Amazon.com than someone trying to sell a used item from their attic," Franchot said.

His office auctions off unclaimed property online through eBay, with buyers paying sales tax, he noted.

Joseph Shapiro, a spokesman for Franchot, later wrote in an e-mail that an individual such as a parent putting an old stroller or clothes for sale on Craigslist would be considered a "casual and isolated" seller exempt from the sales tax.

Madaleno's proposal is reminiscent of the extension of the sales tax to computer services that lawmakers passed in the November 2007 special session. The levy sparked an outcry from executives with high-tech companies who felt blindsided by the measure.

Lawmakers repealed the tax last year under intense lobbying efforts by executives.

This Internet sales tax issue is different in that it is more of a general business issue not limited to high-tech companies, said Thomas Loveland, co-founder of the Maryland Computer Services Association, which formed to lobby against the computer services tax. "Tons of industries sell their products and services on the Internet," Loveland said.

The association is not taking a position on the bill, although individual members are taking sides, he said.