Online sales tax closer

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Collection of sales tax on all online purchases is halfway done.

On May 6, the Senate passed the Marketplace Fairness Act, which would force online retailers nationwide to collect sales tax on purchases based on the rates in the buyer’s home city, county and state.

But don’t start budgeting for the added tax costs just yet.

Although the bill sailed through the Senate by a 69-to-27 margin (four senators didn’t vote), it’s expected to have a tougher time in the House.

Why Congress is involved

The measure is sometimes referred to a national online sales tax, but the money involved is all at the state and local level.

Forty-five states and the District of Columbia collect sales taxes on a variety of purchases. But for decades, beginning with the growth of catalog sales and now with ubiquitous online retail options, there has been concern from traditional storefronts that they are at a tax disadvantage.

These so-called brick-and-mortar stores do collect sales taxes from buyers, but say they lose business to online shops that in many cases don’t collect the taxes.

Congressional intervention is needed because of a 1992 Supreme Court decision (those guys are all over taxes!) that states don’t have the legal authority to tax sales from vendors that don’t have a “physical presence,” or nexus, in the states.

As for those states that don’t collect sales taxes, things won’t change. So residents of Alaska, Delaware, New Hampshire, Montana and Oregon: no worries. You won’t see any sales taxes (unless you’re in one of the areas of Alaska with a local sales tax) on your online receipts.

States win, shoppers lose

The obviously losers are online shoppers who for years have been escaping payment of sales taxes.

In reality, we should have been paying our state’s sales taxes on untaxed purchases via the use tax. As the name indicates, this is a companion to the sales tax that states assess on items bought in other jurisdictions but brought back or delivered to the buyer’s home state.

And the loss of an estimated $23 billion (according to National Conference of State Legislators data) in uncollected sales or use taxes has prompted states to push for the right to collect the taxes from the out-of-state online sellers. So state treasuries would be winners.

Businesses divided

On the business side, there are also winners and losers.

Small businesses that rely almost exclusively on in-person sales would be winners. These shops say because they do collect sales taxes, they have been unfairly carrying the sales tax collection burden.

Plus, they say that buyers window shop at their stores and then use that information to buy the items at lower prices — in part because there’s no sales tax added — from online merchants.

But small businesses with an active online sales component say they will now suffer because they’ll have to implement systems to calculate the sales taxes from buyers in thousands of taxing jurisdictions nationwide.

“Please save us from a government looking to legislate fairness. The Marketplace Fairness Act would be fair only if bricks-and-mortar stores had to do what governments want online merchants to do: Ask every customer where they live and determine, calculate, and collect the relevant state, local and municipal taxes. For more than 9,600 jurisdictions. Then remit,” says Seton Motley, president of Less Government, a Washington, D.C.-based nonprofit organization whose goal is to reduce the power of government.

House less supportive

Across Capitol Hill, however, the prospects for the online sales tax bill are less clear.

Some representatives oppose the bill because they see it as a new tax. Americans for Tax Reform, the group headed by Grover Norquist, who exacted his famous no-tax pledge from most Republican lawmakers, opposes the bill.

Others say the administrative burdens on small business is excessive. The bill exempts retailers with less than $1 million a year in online sales, but some businesses are lobbying for the eBay proposal to change the sales tax trigger to $10 million.

While the conventional wisdom is that it has enough bipartisan support to clear that chamber, expect the debate on the matter to be more vociferous than it was in the Senate.

Would enactment of the Marketplace Fairness Act change how you shop?


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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and a co-author of the e-book “Future Millionaires’ Guidebook.”