Internet Sales Tax Proposals Back on the Table

Article excerpt

Though I didn't do all of my recent holiday shopping online, I still made several online purchases for family and friends. Apparently, I'm not the only one. Studies estimate that nearly 150 million Americans made some form of online purchase in 2012, an increase of nearly 10% over the prior year. My reasons for online shopping are probably similar to those of the other 149 million-plus shoppers: convenience, price comparisons, cost savings, and no sales tax (at least in my case).

Collecting sales tax on internet transactions has been a controversial issue since the first days of ecommerce. In those early days, resistance to sales tax arose on several levels partially to develop and to encourage a robust ecommerce marketplace. However, as the marketplace developed--and began to siphon sales from brick-and-mortar retail stores that were required to collect sales tax--states and communities began to complain. Their opposition focused in two directions: the reportedly unfair advantage that ecommerce retailers had over local businesses and the loss of tax revenue from the sales.

Marketplace Fairness Act

Several attempts have been made in recent years (most recently in 2012) to enact federal legislation to require that sales tax be collected on ecommerce transactions. However, differences between House and Senate legislative proposals, along with the complexity ascribed to dealing with the different rules of the different states (not to mention local sales tax rules), has caused these proposals to languish. But now, in 2013, identical bills introduced in the House and Senate seek to resolve those differences and assert that technology can address the complexity of collecting the tax. The Marketplace Fairness Act (H.R. 684 and S. 336; thomas.loc.gov), introduced in February with bipartisan support in the House and Senate, may represent the best chance yet of implementing a sales tax requirement for internet sales.

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In theory, all internet sales are already subject to state and local sales taxes in the same way that brick-and-mortar purchases are. The challenge is in collecting the tax. When a consumer enters a physical store and makes a purchase, the merchant collects the appropriate sales tax, which is added to the item's cost. Typically, merchants will then periodically report their gross sales to the state and pay the standard sales tax rate on those sales.

While it seems that the merchant is paying the tax (which it charges to the customer), under the law, the customer is actually paying the tax, and the merchant is simply collecting and forwarding the tax payment on the customer's behalf. Consequently, a strict reading of most state tax laws indicates that customers who purchase goods online should already be paying taxes on the goods, but they should be paying the taxes directly to the state rather than through the merchant. While the state may have the legal authority to collect these taxes from individuals (and in very rare cases may do so), this doesn't happen in most cases.

Mail Order Sales

So, why don't the states collect the taxes from ecommerce retailers? This is because of a series of court decisions dating from the heyday of mail-order sales. These cases held that it would be an "unconstitutional burden upon interstate commerce" and a rather complex process to collect taxes not only from the particular customer's state but from all the states where the mail-order/online retailer had sales. …