Internet Sales Tax Bill Builds Momentum in U.S. Senate

A piece of federal legislation, designed the assist the states in requiring that Internet retailers collect sales tax, moved past an important procedural step earlier this month, as the U.S. Senate voted overwhelmingly, 74-20, to consider the bill for debate and amendment, the New York Times reported.

The bill, which is called the Marketplace Fairness Act, is unusual in that both its proponents, and opponents, represent bipartisan collections of Senators. If enacted, observers believe it would trigger online retailers collecting between $22 and $24 billion that, under the current system, goes uncollected.

Some advocates of the bill hail it as leveling a playing field that, in the past, unfairly discriminated against brick-and-mortar retailers, which are required to collect the tax, as opposed to online retailers, which had no such constraints. According to the Times, brick-and-mortar retailers are struggling as a result of the disadvantage. Shoppers often engage in “showrooming,” in which they visit a traditional retailer to get an in-person look at the merchandise, then return home to buy online at a lower price and without sales taxes.

Others favor the bill as a reasonable method for increasing state tax revenues simply by creating a new method for collecting a tax that already exists. “What it means is a lot of money for states and localities,” proclaimed Sen. Richard Durbin of Illinois.

While some anti-tax advocates oppose the bill, requiring Internet retailers to collect sales tax would not constitute a tax increase in a legalistic sense, although it would in a practical sense. Tax obligations on online purchases technically already exist. The problem, from the perspective of advocates of the Marketplace Fairness Act, lies in the collection process. Brick-and-mortar retailers collect and pay sales taxes on the purchases their customers make, whereas purchasers, not the retailers, bear the obligation on Internet transactions. Online buyers have legal obligation to pay a use tax on their income taxes, equivalent to that state’s sales tax, on all untaxed Internet purchases they make. However, only a tiny fraction of buyers actually pays use taxes, and the states very rarely enforce the laws regarding use taxes.

President Obama also supports passage of the bill. According to the Times, the White House said “will level the playing field for local small business retailers that are in competition every day with large out-of-state online companies.”

Under the new act, states could require online sellers to collect sales taxes for the state and local governments. In exchange, state governments must provide the online sellers with free software to calculate sales taxes. The law would carve an exemption for Internet businesses with out-of-state sales of less than $1 million per year. Senators from sales-tax-free havens like Oregon adamantly oppose the bill. Sen. Ron Wyden, derided the proposal as “a targeted strike against the Internet and a targeted strike against the digital economy.”

Several online megastores, including Amazon, have voluntarily begun collecting sales taxes. eBay, however, does not collect sales taxes and remains steadfastly opposed to the bill.

Businesses face a large and ever-changing number of obligations regarding tax compliance, including sales taxes. To make certain your business is properly collecting all taxes, consult the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C., who have a long background of helping businesses throughout New York and New Jersey. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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