Get Ready for Internet Sales Tax

| Analysis

Regardless of whether or not you think paying taxes for online purchases is right, it's time to get ready to pony up a little extra money when you buy from Internet stores. Cash strapped states are pushing for Internet sales tax, and it looks like the Federal government is ready to make that happen.

Internet sales tax is probably coming sooner than you thinkInternet sales tax is probably coming sooner than you think

The U.S. Senate voted to take up the legislation, known as the Marketplace Fairness Act, and with upwards of US$24 billion in potential tax revenue on the table, it's a safe bet there will be a serious push to turn the bill into law.

Currently, businesses that have physical retail locations in a state collect taxes for online purchases made by local residents. For example, if you buy an iPad from Apple's online store and there's also an Apple store in your state, you'll pay sales tax. Companies like Amazon.com, however, don't collect sales tax because all of their sales are online.

States see sales through sites like Amazon as money lost since taxes aren't collected, and they want a piece of that action. Some states, like Colorado and California, have attempted to boost revenue through online sales taxes, but at least in Colorado the legislation was complex and confusing, and ultimately led to Amazon dropping its affiliate program in the state -- which, in the end, hurt small businesses.

As it stands today, the MFA bill would require businesses generating over $1 million a year in out of state sales to collect tax for online purchases, according to the New York Times, saving smaller businesses from dealing with the potential expense that goes along with managing online taxes. Collecting those taxes would come with something of a headache, too, since retailers would be responsible for collecting the appropriate taxes for the location where the buyer lives.

The bill will likely increase state expenses since it would require the software needed to calculate the taxes to come from them free of charge. Assuming states decide to offer platform-native apps instead of a Web-based system for tax calculations, it's a fairly safe bet they'd go with a Microsoft Windows-only solution, which would lead to yet another expense for businesses that run on Macs, either in the form of a new computer, or at least virtualization software and a copy of Windows.

The proposed law doesn't go so far as to force states to require local businesses to collect in-state taxes, but it will require businesses to comply with other state's tax laws. For states that don't currently collect any sales tax -- Delaware, Montana, New Hampshire, and Oregon -- collection systems will have to be built from the ground up since their local businesses will still be required to charge online customers taxes.

In other words, every state will have to comply with MFA regardless of whether or not they have a state sales tax, and their local businesses will have to start collecting sales taxes for all online purchases from customers that live in states with a sales tax.

Hoping for a political party split to keep MFA from becoming law isn't likely to pan out since the bill has bi-partisan support, as does a similar bill that's currently in the House of Representatives. From the bill supporter's perspective, this is good news for local businesses that have been losing sales to online retailers. The idea being that if consumers can't save money when shopping online to avoid taxes, they'll start returning to local shops.

For states on the hunt for new tax streams, MFA has the potential to be a revenue generator, and the notion that they could keep more dollars spent in the local economy is enticing, too. Regardless of whether or not the motives are altruistic, however, the bottom line is that law makers see the potential tax revenue gain a unified online tax law could bring to the table -- and where there's money, action usually follows.

[Some image elements courtesy Shutterstock]

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4 Comments

Miles Leacy

“Companies like Amazon.com, however, don’t collect sales tax because all of their sales are online.”

This is simply a false statement.  If Amazon ships your order to an address in a state in which they have a business presence, such as a warehouse or office, you will be charged sales tax.

Miles Leacy

I don’t know if the rest of your article is accurate.  I stopped reading when you made it clear early on that you hadn’t researched your topic.

Scott B in DC

Jeff:

I love your writing, but this article is so off base that I wonder if someone else wrote it and posted it under your name. First, Miles Leacy is correct about the Amazon situation. Amazon has been negotiating with various states to prevent the widespread issues of sales taxes by making agreements to have a presence in the states. In a deal with New Jersey, Amazon is converting an old warehouse that once belonged to Jamesway and then used by Barnes and Noble to create a northeast regional distribution center. This way, they collect New Jersey sales taxes.

As part of their “pick up” services, Amazon is now in Ohio and Virginia convenience stores. With these pickup services that delivers products quicker than if they were shipped, Amazon now has a presence in these states and have to collect sales taxes.

“Assuming states decide to offer platform-native apps instead of a Web-based system for tax calculations, it’s a fairly safe bet they’d go with a Microsoft Windows-only solution, which would lead to yet another expense for businesses that run on Macs, either in the form of a new computer, or at least virtualization software and a copy of Windows.”

This is purely FUD. If you go back to last summer’s meeting of the National Governors Association, the organization announced the commitment to convincing congress to allow the states to collect sales taxes on Internet and other cross-state sales. In doing so, they announced a renewed commitment to the Streamlined Sales and Use Tax Agreement. The SSUTA is managed by Streamlined Sales Tax Governing Board, a group started by the NGA and National Conference of State Legislatures to simplify sales taxes. In exchange for congress allowing states to collect these taxes, the state will commit to adopting the SSUTA to make collecting sales taxes easier.

If you read the text of the Marketplace Fairness Act (I did), it does have wording that encourages states to adopt the SSUTA. This will include web-based accessible tax calculation, participation with collection services to make it easier for businesses to pay the taxes, and to collect the base sales tax and not the local options. This means that a state with a 4-percent sales tax will collect 4-percent and not a 2-percent local option that a city or county may have. In fact, SSUTA allows the states to consider the Internet as a “locale” so that the state could set its own local option for Internet purchases. The SSUTA also says that the states should not set the Internet locale option higher than any local option in the state. Technically, it is possible that you could pay more for an Internet purchase because your local option is lower than the local option set for Internet sales.

Finally, the SSUTA does not require states that do not collect sales taxes to start collecting Internet sales taxes nor does it require the states to collect sales taxes on behalf of other states. Your assessment of this in the paragraph that begins, “The proposed law doesn’t go so far…” is wrong in that regard. Again the Marketplace Fairness Act does allow for cross-state enforcement by using the rules set up in the SSUTA to make a claim against the merchant to the other state through whatever revenue collecting authority exists—most time it is the state’s comptroller. In this case, for example, Delaware does not have to collect Maryland’s taxes but if Maryland has a problem with a Delaware merchant, Maryland’s comptroller can seek collection assistance through Delaware’s comptroller.

There will be problems at the beginning. There will be confusion, implementation issues, growing pains, bad actors, etc. Once again, it will make Murphy look like an optimist! However, when you report on something, please have the facts before you do. It took me two hours to get the facts when it was made an issue first by the Republican Governors Association last year which I used to report to a group I am involved with. All it takes is a little search engine magic and picking up the phone and verifying the information with the parties involved. Call the NGA. Call the SSTGB. They will help you with the information so you do not produce FUD!

Homer Yates

What do people except, didn’t Obama say “are you ready for change” will people you are getting it. I just love the way Obama is shafting the people who voted for him.

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