WASHINGTON — The question of whether states can require online retailers to collect billions of dollars more in sales taxes has stirred the business world, stymied lawmakers and generated enough disagreement to reach the U.S. Supreme Court.

It also highlights a clear policy divide between Republican Sen. Ted Cruz and his Democratic challenger, Rep. Beto O’Rourke of El Paso.

Cruz is apt to launch a freedom-themed stem-winder against any mention of expanding states’ taxing authority over the growing world of e-commerce. O’Rourke, while much more low-key on the topic, is open to that kind of change in the name of “leveling the playing field.”

Both lawmakers say they are fighting for Texas’ “mom and pop” businesses.

“This is an issue that pits the big guys against the little guys,” said Cruz, who views the “little guys” as small online retailers while O’Rourke sees them as small brick-and-mortar stores.

1 / 2Texas Sen. Ted Cruz, a Republican, has fought against an expanded online sales tax, saying that the internet has flourished because it has "been free of taxes and free of unnecessary government regulations."(Andy Jacobsohn / Staff Photographer) 2 / 2Rep. Beto O'Rourke, D-El Paso, says the online sales tax should be expanded to "level the playing field."(Jeffrey McWhorter / Special Contributor)

Whether that divide moves the needle on the Senate campaign trail could depend on whether the Supreme Court this month reverses a 26-year-old ruling that internet merchants can only be required to collect sales taxes in states where they have a physical presence.

Any court action, which could prompt a response from Congress, would send shock waves through more than just the retail industry.

Look no further than Texas, a sales tax-reliant state that has backed the effort to overturn the existing standard. The state misses out on an estimated $800 million a year thanks to the current rules, while local governments in Texas tally lost revenue of some $200 million a year.

Cruz dismisses that dynamic as short-sighted. O’Rourke puts it front and center.

“If you like your property taxes going up, if you like the status quo, then leave things as they are,” O’Rourke said, suggesting that the additional sales tax revenue could result in local governments not increasing property tax rates.

Long dispute

Origins of the online sales tax dispute predate the rise of online shopping.

The U.S. Supreme Court highlighted the physical presence standard in 1992 as part of a case involving an office supply mail-order company. The general idea was that states can’t inordinately burden interstate commerce by imposing levies on distant entities.

Now enter a world where mail-order catalogs are curiosities and online operations like Amazon, Wayfair and Etsy are retail behemoths.

The shift has provided consumers with a bevy of point-and-click checkout options that can result in greater convenience and friendly price points. It’s also put states like Texas on the defensive over their sales tax bases as online retailers have varied in dealing with the levies.

Consider Amazon, which Texas forced to start gathering state and local sales taxes in 2012 due to the presence of a distribution center in the state.

The company has since agreed to do the same on sales made in the 45 states with those kind of taxes. But it takes that approach only for goods sold from its own inventory. So the half of Amazon’s sales that come by way of third-party transactions may skate the taxes.

Even against that backdrop, Congress has so far proved unwilling to step in.

The inaction comes in part because Cruz, among others, has been successful in making the case that the internet has “flourished and driven the economy worldwide” because it has “been free of taxes and free of unnecessary government regulations.”

“Unfortunately, wherever freedom flourishes, Washington gets nervous,” he said, blasting large brick-and-mortar retailers for prodding that kind of response.

The Texan said any expansion of the online sales tax would impose a costly burden on small online retailers, subjecting them to the yoke of thousands of taxing jurisdictions across the U.S. and robbing them of ability to seek redress in a timely manner.

“A mom and pop retailer in Texas would be required to know the current rate of the water authority in Buffalo, New York, or the school district in Sacramento, California,” Cruz said. “And to know if and when that tax rate changed on any given day.”

The U.S. Supreme Court is expected this month to rule on a critical case covering the online sales tax. (Al Drago / The New York Times)

Sales tax flip side

While that viewpoint is echoed by many online merchants, the bookkeeping burden has been lessened by specialized software that automates sales tax compliance. There’s also a flip side to the underdog story.

O’Rourke, among others, pointed to the “little gal and the little guy” — the brick-and-mortar “local furniture store or office supply store or clothing store” — that are disadvantaged by having to deal with sales taxes avoided by many of their online counterparts.

“We have to level the playing field and make sure we’re standing up for those Texas businesses,” he said, adding that he’s still reviewing legislation that could address the issue.

The Democrat also pointed to the tax dollars not making it into the coffers of state and local governments, arguing that such revenue could be used to "fund schools, to fund teacher salaries, to fund keeping the lights on at the park or books on the shelves of the library."

And that final point is driving the battle before the Supreme Court, which is expected to rule on the case this month.

The state of South Dakota in 2016 enacted a law aimed at overturning the status quo, arguing instead for a standard of "economic presence." Texas Attorney General Ken Paxton, a Republican, joined 40 other state attorneys general in signing a brief that supported the effort.

One key data point in arguing that the states are "uniquely harmed" is the vast sum of tax revenue — more than $800 million in Texas alone — they missed out on in 2012.

Cruz, who led a brief in opposition to South Dakota's effort, declined to comment on Texas' involvement in the case. He said it "may be true" that state governments could stand to collect many more dollars in tax revenue if the rules changed.

But “at the cost of a great many jobs and a significant diminishment in competition online,” he said.

“There are state governments that are eager to tax the living daylights out of people who don’t live in their state,” Cruz said. “Because politically speaking, it’s free money. You can tax the heck out of people who can’t vote against you.”

Washington correspondent Katie Leslie contributed to this report.