Online merchants large and small may soon be collecting sales tax from customers, but the debate rages on as to whether this move will actually level the playing field for brick-and-mortars and their Web competitors.

The House Judiciary Committee heard testimony last week, followed up by a Senate Commerce Committee hearing Wednesday, about pending legislation that would allow states to impose an online sales tax for all web retailers. The Senate bill exempts small businesses with up to $500,000 in gross and annual sales from collecting online sales taxes, while the House bill exempts those with up to $1 million in gross and annual sales.

Supportive lawmakers say the Online Marketplace Fairness Act is intended to close a loophole -- left open by a 1992 Supreme Court decision -- which allows consumers to escape taxation when making online purchases. A general assumption was that all small businesses were supportive of the proposed legislation, however some small online retailers argue not so fast.

Mike Vahey, owner of Breathe Healthy, which sells face masks online, says the company currently is required only to charge 5% sales tax to those customers who reside in Virginia, where the business is headquartered.

“Right now we charge people sales tax if they are from our state,” Vahey said. “For any other state, the burden is on them [consumers] to pay it, and I’d assume they don’t.”

Vahey argues that the notion this bill would “even the playing field” between brick-and-mortar stores and online businesses isn’t factual, because so many physical stores also retail online today.

“Brick-and-mortars will say [current sales tax laws] are unfair because Amazon is so big, but I am not big. I am a small business,” Vahey said. “I think it’s another way for state revenues to be increased, but you can’t say it evens the playing field.”

Breathe Healthy will be forced to pass on costs to the customer, and will also face higher administrative and compliance costs if the law goes into effect, he said.

“I already spend a certain amount of time each week making sure I am in compliance with other taxes I have to pay,” he said. “This also increases the size and scope of regulation, and I am for reducing the size of government and administration.”

Online businesses, such as Vahey’s, that are small in size don’t gain more customers due to lack of sales tax, he said. Instead, he is forced to absorb shipping costs for his customers in order to remain competitive. 

Cost is not the issue for Mike Bisceglia, owner of Stauer.com, and online jewelry retailer. Instead Bisceglia is concerned about the complications involved with complying, if the law were to pass.

“I understand states and localities want to try to get their funds up,” he said. “But from an operational standpoint it will be reasonably onerous for us. For example if we are selling jewelry in Rhode Island, there would be sales tax. But if we are selling rare coins, there won’t be.”

Stauer also sells via mail order, and where that form of consumerism falls in this sales tax debate is unclear. Currently mail order has the same basic rules as Internet sales, but Bisceglia said he has concerns over where that would fall if the bill became law.

As a 500-employee Web company, Bisceglia believes his advantage over brick and mortars has more to do with saving money on inventories and rent than it does sales tax.

“We have 60-times the inventory of an individual local jewelry store, and can manage that inventory in one location rather than having inefficient inventories around the country,” he said.

Royal-Pedic luxury mattress company in Beverly Hills, Calif., sells its goods both in-store and online, according to CEO Tony Kelemen. He said brick-and-mortar stores often lose customers to online competitors  thanks to current sales tax laws ,  because customers will check out products in-store, and then purchase them online. Skipping out on sales tax  charges by shopping online has become a trend among customers, he said.

“This [bill] is a way to level the field,” Kelemen said. “But it also means online dealers would have to file sales tax returns with umpteen locations and states. Brick-and-mortars will continue to be negatively affected if something like this doesn’t pass.”

Follow Kate Rogers on Twitter at @KateRogersNews