Businesses War Over Online Sales Tax
Last week, the Senate voted 69-72 in favor of the online sales tax bill — the “Marketplace Fairness Act,” as it’s officially called. Although it still needs to go through the House – where it seems less likely to pass – there is a constant back and forth of what the measure could mean for online merchants.
Although a new bill, the Marketplace Fairness Act has roots in a 1992 Supreme Court ruling that states do not have the legal jurisdiction to compel out-of-state retailers to collect sales tax — they could only do so if the retailer had a physical presence in that state. This of course was more related to catalog ordering, but now that online businesses are so prevalent, states and local governments are seeing huge losses in uncollected sales tax. In a recent article in the Huffington Post, Stephen Ohlemacher cites an estimate by the National Conference of State Legislatures, which claims that states collectively lost $23 billion last year. However it’s important to note that this is not a new tax, but simply a measure to impose an online sales tax (the amount is yet undetermined). Under the “use tax,” law consumers are already required to declare any items they bought online so that they can be taxed for them. The problem is that no one really does it. This bill automates the process so that the tax is collected at point-of-sale transactions.
Some of the biggest proponents of the bill are Walmart and Amazon. Originally, Amazon was opposed to the bill; it has since switched sides. If you’re wondering why a giant online retailer like them would support such a measure, it’s because they have so many warehouses around the country that in many states they already have to charge a sales tax. The reason these giant retail chains, and even smaller businesses with so-called “brick-and-mortar” stores are in favor of the bill is because they argue they are unfairly losing business to online competition. Under the current system, bill proponent argue, someone may go into Best Buy and look at the products they want, but then actually purchase the product from another vendor online where they won’t have to pay sales tax.
Many Republicans — and online powerhouse eBay — oppose the bill, arguing that it is unfair to small businesses, which would have to comply with numerous different tax codes for every state, and run the risk of being audited if they make a mistake. In essence, they argue, it creates an unfair burden on budding Internet retailers instead of the states.
It remains unclear if the measure will pass, and what, if any, effect it would have on small online businesses. House Speaker John Boehner, R-Ohio, has stated that he “probably” would not support it, and House Judiciary Committee chairman Bob Goodlatte (R-VA) stated: “I do not believe the Marketplace Fairness Act is sufficiently simplified yet…There is still not uniformity on definitions and tax rates, so businesses would still be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions.” Supporters, however, argue that readily available software would remedy this logistical headache (the current bill mandates that states provide retailers with the software free-of-charge).
As of right now, online businesses that make under $1 million in out-of-state sales don’t have to worry — they are exempt from the Marketplace Fairness Act. This threshold is too low for many opponents, who want to see the bar raised to $10 million in sales. Right now the main effect that many are arguing is that it could dramatically reduced profit margins for small businesses looking to compete in the online world, and the nightmare of having to adhere to numerous tax codes will be a burden to start-ups and self-employed individuals that sell goods online. The National Retail Federation’s Rachelle Bernstein countered to MSNBC’s Chris Hayes that their survey found that only 10% of online shoppers may stop buying online if the new bill was put into law, and the vast majority claiming they’d accept the tax because of the convenience of shopping online.
Angie Picardo is a writer at NerdWallet, a financial literacy site that offers advice on topics from business finance to understanding personal finance. Walmart image courtesy of Big Stock Photo.