Will Online Sales Tax Bill Spur or Stifle Competition?

Strong bipartisan support sends controversial Marketplace Fairness Act to the House, as opponents continue to raise concerns about impact on small businesses.

By Kenneth Corbin
Tue, May 07, 2013

CIO — The U.S. Senate last night approved a bill that would give states novel taxing authority that could effectively end tax-free online shopping for many consumers.

Online Sales Tax

In a 69-27 vote, the Senate approved the Marketplace Fairness Act, a controversial measure that would authorize states to require out-of-state online retailers to collect and remit sales taxes on purchases that their residents make.

Currently, ecommerce companies only collect sales taxes on purchases made in states where they have a physical presence, the threshold for taxing authority that the U.S. Supreme Court set in a 1992 case concerning a catalog company.

But in that ruling, which predated the commercial Internet, the high court said that while states could not act independently to compel outside sellers to collect the tax, the U.S. Congress could grant them that authority by virtue of its jurisdiction in matters of interstate commerce.

"Under the legislation, states would have to provide software with the appropriate tax rates, but that still leaves the burden on retailers of incorporating the information and actually collecting the tax, a burden that will hit smaller retailers disproportionately hard."

-- Nita Ghei, Policy research editor
George Mason University's Mercatus Center.

Backers of the Marketplace Fairness Act contend that the measure is necessary to level the playing field between Internet retailers and brick-and-mortar stores, and note that the bill would only give states the power to collect a tax that is already owed.

No New Taxes (Well, Maybe)

"Some have said it's a new tax. It's not. It's an existing tax," Sen. Lamar Alexander (R-Tenn.), one of the bill's co-sponsors, said on the Senate floor.

Indeed, in states with a sales tax consumers are required to keep track of the purchases they make online, and then report the expenditures that weren't taxed at the time of sale on their income returns. But that's news to many Americans, and even most of those who are aware of the sales-tax obligation ignore it, with the result that states lose out on billions of dollars of revenue that is owed to them.

Dick Durbin, an Illinois Democrat and co-sponsor of the bill, cited estimates that only 5 percent of residents in his state report and pay the tax on Internet purchases, arguing that the bill is a necessary legislative step to adapt to the steadily increasing volume of online shopping.

"What's it all about? It's about the way commerce has changed in America," Durbin said.

Supporters of the measure also contend that it puts Main Street retailers at a competitive disadvantage, arguing that savvy consumers are channeling more of their spending online because sales taxes aren't collected.

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