New Law Requiring Tax on Internet Sales Moves Forward

By Ken Berry

The federal government moved one step closer toward imposing state sales tax on online retail sellers when the Senate voted on April 22, 2013, to bring the Marketplace Fairness Act of 2013 to the floor for limited debate. Passage of this controversial legislation – nicknamed the "Amazon law" because it would affect giant Internet merchants like Amazon.com – appears imminent. A bipartisan coalition of seventy-four senators, including twenty-four Republicans, voted in favor of cloture. Back in March, three-quarters of the Senate approved the legislation in a nonbinding vote. 
 
Under the proposed law, states and local governments would require Internet retailers and other remote sellers with more than $1 million in annual sales to collect sales taxes. Then these entities would have to fork over the money to the states. But it won't be automatic. The states will have to install software and improve their tax collection systems to accommodate the influx.
 
The stakes are astronomical. According to an estimate by the National Conference of State Legislatures, the individual states collectively missed out on $23.3 billion in sales tax revenue in 2012. The new proposed legislation could help fill their coffers.
 
What's more, brick-and-mortar business operations have been clamoring for an even playing field. Currently, consumers generally don't have to pay any sales tax when they purchase merchandise online. Based on a landmark US Supreme Court case (Quill Corp. v. North Dakota (91-0194), 504 US 298 (1992)), a state can enforce sales tax laws only if an Internet retailer has a "physical presence" in the state. In contrast, shoppers in downtown districts and malls are required to pay any applicable state and local sales taxes when they buy goods in a store.
 
The Marketplace Fairness Act, called the Main Street Fairness Act in a previous version, has been championed by Senator Dick Durbin (D-IL). Durbin has long maintained that this new law doesn't represent a tax hike. "There are some critics who will say our bill is a tax increase. Not true," said Durbin. "Our bill does not create one new penny in taxes, it simply allows states to require merchants who sell products online to collect taxes on sales to consumers in that state – just as Main Street businesses do every day."
 
Not surprisingly, some of the major online sellers are fighting back. For instance, this past weekend eBay launched an effort to mobilize opposition to the proposed law by e-mailing forty million of its users. But Amazon appears to have conceded the issue and has already started to collect sales tax in several states.
 
It appears it's more a question of when, not if, consumers across the land will be paying sales taxes on their online purchases. We'll continue to monitor the progress of this new law as it works its way through Congress.
 
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