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Internet sales tax: who’s for it, who’s against & what comes next

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Congress, retailers and the tech community are buzzing about a so-called “internet tax” that will pass the Senate any day now. The proposed law has made for strange allies (Amazon (s amzn) and conservative Republicans are both supporters) and confused consumers. Here’s a plain English explanation of the tax, the debate and how it could all turn out.

Is this a new tax on the internet?

No, the proposed Marketplace Fairness Act simply provides a practical way for states to collect sales tax for goods sold on the internet. Right now, if you live in Ohio and buy something online from a New York merchant, you’re the one who is supposed to tell Ohio and pay the tax. But few people actually does this — so the law makes the out-of-state merchant responsible instead for collecting the tax.

The law would only apply to businesses that sell more than $1 million a year (so don’t worry about those bobbleheads you sold on eBay). It also requires states to provide free software to merchants to help them collect tax from more than 9,000 state, county and local taxing authorities.

Very popular, so far. The Senate voted 70-24 to pass an early version on Tuesday — a final version is expected to pass by the same margin this week.

Sounds like more taxes. Why is it so popular?

State governments say they are losing billions on taxes they would have collected if people had gone to the store instead of shopping on the internet. Same for county and city governments who argue that “show-rooming” — where people go to stores just to look before buying online — is killing local communities.

Brick-and-mortar stores like Wal-Mart (s wmt) say online retailers have an unfair advantage because they can charge lower prices since they don’t collect tax. Amazon(s amzn), an online retailer, is surprisingly on Wal-Mart’s side (likely because Amazon already has to collect tax if it has a physical presence in a state — and its warehouses are in more and more states.)

The White House is all in favor too.

Who’s opposed to it?

Senators from the few places that don’t have a sales tax (Oregon, Montana, Delaware and New Hampshire) say the law will force businesses in their states to set up an expensive tax-collection system for the benefit of other states. Oregon’s Sen. Ron Wyden is leading the opposition.

Anti-tax crusaders like Grover Norquist and a few Tea Party Republicans oppose on the grounds the law will lead to bigger government. The Wall Street Journal editorial board doesn’t like it either.

eBay said the law will hurt millions of people who have home-based businesses, and wants the exemption to be raised to $10 million a year. Tech lobbyists like TechAmerica worry about the effect on e-commerce, although giants like Google(s goog), Apple and Facebook have stayed largely silent.

The financial industry is quietly opposing the bill too, worried that Wall Street haters in other states will start taxing securities transactions.

How will this end?

The bill appears to be a sure thing in the Senate but still faces a fight in the House. For now, the law’s supporters appear to have the upper hand but this could change as opponents build a coalition to shift momentum.

Ultimately, it will be about which narrative prevails: that the bill is a common-sense measure to create a level retail playing field and allow states to collect the money they’re owed (as supporters say); or, that it’s a burdensome new tax that will harm small businesses and ecommerce (as opponents say).

To read more, see the New York Times’ overview and this Bloomberg editorial.

(Image by Keith Bell via Shutterstock)

8 Responses to “Internet sales tax: who’s for it, who’s against & what comes next”

  1. In regards to the “Marketplace Fairness Act”. While good intentioned, this legislation is harmful in many ways and since rushed through the Senate deserves a more thoughtful study before passage. Proponents of this bill say it will be easy. REALLY? Even if we take them at their word “only one state tax rate” and “perfect running software to calculate”, HOW DO PAYMENTS GET REMITTED to all 46 states? Do we write 46 monthly checks? Not all small merchants run automated and to input additional information by hand is time consuming and takes time away from normal business operations. What about audit risk? Can the tax board in Tennessee come after a merchant in Florida? Is it even moral to burden an out of state merchant to collect taxes on behalf of a state they don’t live or work in? Why not ask China or Mexico to collect Tennessee taxes?
    Is this constitutional? Will surely be challenged in the courts, but why this legislation is truly harmful is that in such a weak recovery you are burdening the very small businesses that are one of the few sources of growth in our economy. Hiring in the Etailing sector will freeze or decline and companies that are mobile and of large enough scale will simply move offshore to compete. Our tax code is already written in a manner that encourages large companies to domicile offshore this legislation encourages the medium and even portable smaller sized USA businesses to join them. Don’t kid yourselves this revenue comes right out of the pockets of the average American consumer who at the moment isn’t exactly “winning”. The extra taxes the citizens will have to pay means LESS money in their pockets to spend locally DEFLATIONARY (except of course for the growth of state government).
    If this legislation must be passed then the small business limit needs to be moved up to at least five million instead of one million as it is easy to get to this level even as a very small company if you sell electronics, cars, machinery, luxury products, travel, etc. The law should require one payment address for all 46 states. Let the software folks forward 46 separate payments not American businessmen and women.

  2. John Mayo

    There is no discrepancy in how brick and mortar and online companies are taxed

    now. Online companies just like brick and mortar have to collect sales tax from

    in state purchasers just like brick and mortar shops do. Both are free to ship

    outside of their state without having to collect sales taxes for the other

    states. This practice has been with us since Sears was founded, and there is

    good reason – to avoid Balkanization. Sales taxes can change hundreds of times

    in a year. How often are they supposed to be checking in. How high will

    penalties be in each jurisdiction for a late fee if someone sends the payment a

    week late by mistake? $50 for each county? state? They haven’t delved into it?

    One million is a small retail business probably employing 3 people.

    9.60% – average national sales tax
    2.9% – merchant transaction fees for that volume through Paypal
    1000000 total retail sales floor for law
    =$96000 in taxes consumers never had to pay before
    = $2784 in direct new costs for the smallest business covered just in

    transaction costs. If they are able to run a generous gross profit of 10%, that

    is 3% of profits in a weak economy.

    That is before you add in the cost of implementation. Overstock implemented it

    at a cost of 700k and have a report about it. Congress isn’t even sure if they

    will make it available for a variety of e-commerce +platforms. They certainly

    won’t keep up with the market. After all, these are the people who failed to

    get a database together for our vets after 13 years and few hundred million.

    Consumers for the entire history of our nation have been free of this tax. If

    the states, counties and cities want to force their own citizens to pay their

    sales tax scheme that is fine, they can tax it for all in jurisdiction

    purposes, but they cannot not reach out demand collection activities from

    people outside of their borders. It is a norm of American politics.

    If brick and mortar mom and shops are not taking advantage of selling on the

    Internet it is no one’s fault but their own, the Internet is not a fad. But

    this is not a protection for them, it is a protection for big box stores that

    suddenly find themselves competing with 1000s of small shops operating in niches who are experts in their respective fields and price competitive. A

    robust online marketplace serves the interest of everyone.

    Politicians will throw out the old line of “Teachers, firefighters, and police

    officers”. Don’t believe it. They use this line because everyone respects these

    people. There is plenty of money out there for them already though. What they

    really mean is “bureaucrats, staffers, lobbyists, and administrators”. If

    teachers, firefighters and police officers got every new tax sold in their name they would be the wealthiest people in the world. Believe that.

  3. John Mayo

    Their software is a joke. Overstock implemented it at a cost of 700k and have a report about it. What e-commerce platforms does it work with etc… Huge pain, expect 300-400 minimum for a small business to comply with it. Since Sears was founded there have been no taxes on purchases made over state lines. This is a horrible precedent. One million is a small retail business probably employing 3 people.

  4. ajaynejr

    How about adding this to the law. States must audit and/or bring collection actions in a county where the business is located, and businesses may file appeals and bring legal actions in a county where they are located.

  5. Hey politicians, quit pissing away the tax money that you already get. You do not deserve more based on your inability to control spending.

    Hey small businesses, quit asking the government to tax your competitors under the guise of “fairness”. If your business is in Florida, you should be smart enough to get a solution together that allows you to have the same “advantage” of selling in ALL OF THE OTHER STATES! You will not see your business grow when your competitors have a greater tax burden. They will still have the same infrastructure, mass buying power, and convenience that they have today.

    If you really want to have a level playing field, go after the supply chain. Form a consortium where small businesses coordinate their purchases and can get the same bulk discount that larger retailers enjoy.