United States
Staffed with 100% US Employees

Internet Sales Tax Coming Soon?

June 3, 2013 by Ed Becker

For years we have enjoyed the freedom of ordering clothes, gadgets, and toys tax-free over the Internet, but all that could be changing soon. Legislation aimed at closing the Internet sales tax loophole is rapidly working its way through the political machine.

The Marketplace Fairness Act

Under current law, state sales tax does not apply to merchants who have no physical presence in the state where an item is shipped. So if a California based store sells an item to a customer in Kansas, the seller would not be required to collect upfront sales tax on the transaction. Consumers are supposed to report out of state transactions and pay the “Sales and Use” tax required by most states, but this rule is rarely enforced. The Marketplace Fairness Act (MFA) seeks to shift the burden of tax compliance from the consumer to the merchant.

On May 6th, 2013, the Senate passed their version of Marketplace Fairness Act. The bill would provide states with the power to collect sales tax on online merchants at the time of the sale, generating an estimated 23 billion dollars in new tax revenue. The bill also mandates that state treasuries simplify and automate tax-collecting procedures. Although the bill is still working its way through Congress, it could go into effect as early as October 2013 if it becomes law.

Key Players in the Fight

Big businesses, such as Amazon and Wal-Mart, are overwhelmingly supportive of the MFA . But why? One would think that these online retailers would not be thrilled about incurring additional costs to comply with out of state tax assessment. However, the bill would create additional barriers to small and medium sized competitors that would diminish their competitive advantage. Wal-Mart, for example, already has a physical presence in all 50 states, thus requiring tax compliance on all online sales. The MFA would immediately crush the advantage of smaller out-of-state competitors who are not facing this same requirement.

Opposition against the bill is being led by eBay, who argues the bill would be too burdensome on small business. They argue that it would create an exceedingly complicated burden on merchants to assess tax rates for all 50 states. Compliance would be a major technical challenge, requiring a significant investment to audit each state’s individual tax laws.

How Businesses and Shoppers will be Affected

Online shoppers will pay tax rates equivalent to what they would experience shopping at a store in their hometown. The average consumer is expected to see $170 annual rise in upfront taxes. The law would not affect consumers in states that do not impose sales tax, including Alaska, Delaware, Montana, New Hampshire, and Oregon.

Businesses generating less than $1 million in annual revenue would be exempt from the tax. Online retailers with revenue above this threshold would be required to implement a system to collect tax upfront on all sales based on the buyer’s home state.

What are the odds of this bill actually passing? The Republican controlled house is still very divided on the Marketplace Fairness Act, but many political analysts are confident it will round up enough support to pass. President Obama has voiced support for the bill and is highly likely to sign into law if given the opportunity. Although the future remains uncertain, it’s important to start considering the impact an Internet sales tax could have on your business.

Related Posts