Taxing E-Tail: How The Senate Plans To Tax Online Shopping

Americans are supposed to pay state taxes on goods purchased online. Only 1.6% of taxpayers do. A new Senate bill could help states change that, and collect billions of dollars in new revenue

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BRENDAN SMIALOWSKI/AFP/Getty Images

State taxes may soon be tacked on to goods purchased online

It looks like shopping online is about to get more expensive. On Monday, the Senate overrode a filibuster and moved to debate the Marketplace Fairness Act, which would give states the authority to tax Internet sales as early as next year. A final vote is expected after the Senate returns from recess in early May.

Actually, many internet sales are already taxed, in theory. The current default rule nationwide is that taxes must be collected on Internet sales to customers who are in states where the company selling the product has a “physical presence.” That tariff is collected indirectly from the customer, who is supposed to calculate the sales tax and add it onto his or her annual state tax bill.

You mean you haven’t been calculating and paying your taxes on sales from internet companies in your state? Don’t worry, almost no one does. In fact only about 1.6 percent of taxpayers pay taxes on online goods. Last week NPR found one of these patriots, Daniel Gottfried, a lawyer at Rogin Nassau in Connecticut, who said, “Its a lot of fun. I go through my credit card receipts…page by page.”

Obviously there are more aisle-avoiding, online bargain shoppers than tax-thrilled Gottfrieds. So cash-strapped states have tried to take matters into their own hands. Nine states require online behemoth Amazon to collect their state sales tax rather than relying on customers to do the job. But the vast majority of politicians in the Senate, the US Conference of Mayors and 29 governors (including the ideologically opposed South Carolina Gov. Nikki Haley and California Gov. Jerry Brown) believe there needs to be federal guidance.

“Every state’s rules are different and sellers have no certainty on when and where they should collect tax,” says Steve Kranz, a tax expert at the McDermott, Will, & Emery law firm. “A national rule set by Congress under its Commerce Clause authority would avoid a patchwork approach that puts audit risk on business.”

So the new bill is a mechanism for the states to collect a tax that is already owed. But the bill stipulates that before the state can collect the state must provide free software to out-of-state merchants to help them file transactions. Companies with less than $1 million in out-of-state sales would be exempt.

The bill could raise billions for the states, although estimates vary. The New York Times reports that the bill could haul in between $22 billion to $24 billion. The Washington Post, citing a University of Tennessee study, says the states may raise “as much as $11 billion.” The Tax Foundation says the figure would be much less.

No matter how much the bill can raise now, the tax will likely raise more much more in the future. The Forrester research firm estimates the US online retail industry is worth $231 billion, and projects it to grow to $370 billion by 2017.

The Obama Administration has expressed its support for the bill. The Office of Management and Budget (which must have been working overtime as roughly eight in ten staffers were recently put on unpaid furlough), opined that the bill would “eliminate the unfair advantage currently enjoyed by big out-of-state online companies over local neighborhood-based small businesses.”

Interestingly, Amazon, the largest online retailer that many small businesses resent, is in favor of the bill.  The company has realized that their extremely popular Prime one-day shipping requires the company to buy up huge warehouses close to its customers. It also already has to comply with “Amazon laws” in nine states.

Traditional retailers like Best Buy, Foot Locker, Barnes & Noble, Gap, Home Depot, J.C. Penney, Home Depot, REI, Sears, PetSmart, Target and Walmart support the bill as well.

But there are others who don’t. Senate opposition is united around the unlikely coalition of states without sales tax, like Oregon’s Sen. Ron Wyden and Max Baucus; libertarians like Kentucky Sen. Rand Paul and Texas Sen. Ted Cruz; as well as supporters of regular order like Ranking Finance Committee Member Orrin Hatch, who would have preferred to put the bill through a mark-up before it hit the floor.

E-Bay CEO John Donahoe also dislikes the bill. He disagrees with the President that it levels the playing field and Reuters reports that he sent a letter over the weekend to the company’s 40 million users saying that the “the legislation treats you and billion dollar online retailers—such as Amazon—exactly the same.” He has pushed for the bill to exempt online businesses with less than $10 million in annual out-of-states sales.

The Wall Street Journal editors wrote that online businesses will be buried trying to keep track of the sales tax in other states. “For the first time, online merchants would be forced to collect sales taxes for all of America’s estimated 9,600 state and local taxing authorities,” it said. While the bill outlines that the state must create a single entity responsible for return processing and remote sales, the WSJ’s concerns might prove the legislation’s downfall once it reaches the House.

“[The bill] still has a long way to go,” House Judiciary Committee Chairman Bob Goodlatte told The Hill Sunday. “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.”

28 comments
donwlarson
donwlarson

Usually each State that has a Sales Tax also has a Use Tax. A Use tax is supposed to be paid by the purchaser of out-of-state items that are taxable in his/her own state. That practice is rarely completed.

So to be balanced, a law like the one proposed should require customers from out-of-state whose state would tax an item, require the in-state vendor to collect that tax and file multi-state tax reports and pay those taxes just like online vendors. Otherwise this system is unfair and perhaps if it did pass, be held unconstitutional.

yogi
yogi

It seems like every article I've read on this tax focuses on items that are physical in the real world and shipped to the buyer, would the sales tax apply to downloaded purchases? Will your 99 cents iTunes song now cost 99* cents?

adriane5820000
adriane5820000

It is time to end the 'divine' rights given to the internet. A business is a business is a business, and if they sell goods in a State that has a sales tax, they should also.

AfGuy
AfGuy

Am I the only one that looked at the phrase "E-Tail" and thought of an online porno/prostitution site?

Sacred, your thoughts...?

drudown
drudown

So which is it? Do you want to be fiscally prudent or not? You can't pay lip service to fiscal prudence and categorically preclude higher taxes in times of record deficits.

roknsteve
roknsteve

So we're supposed to believe this is the most important business in the Congress?  How about a jobs bill? 

Titanus
Titanus

So the key is to have ten one million dollar businesses.  Really not sure how all of the states are going to agree on this.  States tax different items and items at different rates, if they tax at all.  This might just lead to a VAT that is the same in all states.

gysgt213
gysgt213

Amazon wasn't always on board with this.

formerlyjames
formerlyjames

Next step, some giant lobby will push for higher state taxes on all online purchases than on local purchases. 

bobell
bobell

The interesting part is going to be designing software for the companies to use. Remember, the retailer will have to apply the tax law of the purchaser's state, and each state has different laws. Not every proiduct has a bar code on it, and even with bar codes someone from each state has to decide for each product or class of product how to code it into the software. Ivy_B points out how fine the dividing line is between taxable and nontaxable in Pennsylvania, and there are similar fine lines everywhere. Some states, like Virginia, tax groceries, and just to make it more complicated Virginia's sales tax on groceries is at a lower rate than that for other items.  This won't be easy.

If the bill gets through the Senate -- not yet a sure thing -- I will be interested to see how the House reacts.  You'd think states rights-ers would rally around it, but the same people who love states hate taxes.  Talk about ambivalent!

grape_crush
grape_crush

Meh. Flat sales tax for all online purchases, split between states based on percentage of total tax collected. Problem solved. Probably would work for brick and mortar sales as well. Good luck getting anything like that (or anything at all) passed.


MrObvious
MrObvious

Time for some people to scream socialism.

Ivy_B
Ivy_B

I actually do pay, but I've been paying the estimate that PA allows based on income or something. However, I buy most of my stuff from Amazon (books!) and they made an agreement with PA and now collect state tax, so this year I'm going to keep track of all my non-Amazon purchases.

What concerns me is that they companies get the subtle distinctions right. For example in PA, Raincoats are non-taxable, Umbrellas are taxable. Sunburn preventatives are taxable; sunburn treatments are not. It goes on. It's going to be difficult to be sure smaller retailers get it right, although I understand that those with sales under a million are exempt.

TaxCloud
TaxCloud

@yogi You are asking a question that has nothing to do with the bill, that's why your question is not being addressed. The legislation is about sales tax collection, not about the sales tax itself.

To answer your question though, digital goods (such as your iTunes example) are already taxable in some states, and not taxable in other states - the differences between the states tends to vary based upon each state's definition of Tangible Personal Property (TPP). The determination of such policies rightly rests at each state's legislature, and Congress has no authority (under the 10th amendment) to try and change that - and is not considering that with this bill.

paulejb
paulejb

@roknsteve 

What happened to Barack Obama's laser focus on jobs? All he talks about is new taxes on everyone.

Ivy_B
Ivy_B

@bobell Another complexity is that in Philadelphia, the PA sales tax is one cent higher than the rest of the state. 

However, Amazon seems to have figured it out, but I do plan to check carefully.

bobell
bobell

@bobell Although, now that I think of it, Republicans hate mostly income and estate taxes.  Payroll taxes look okay, and they're apparently fans of sales taxes, which they do their best to increase even as they cut state income taxes. Ask Bobby Jindal -- you know, the guy who disclaims the Stupid Party even as he acts like a member of it.

So the House ought to rally round more sales taxes.  But with those people, who knows?

TaxCloud
TaxCloud

@grape_crush violates the states' right to determine and enforce their own tax policies.

grape_crush
grape_crush

"...Flat sales tax for all online purchases..."

With suitable exceptions for food and 'sin' items, like tobacco.

tommyudo
tommyudo

@Ivy_B 

If I can make a suggestion - next time you want to buy a book avoid a behemoth like Amazon. Go to Abe Books, where the same book, used, and in some cases new, can be bought for less from small booksellers. You save a few bucks and you are keeping the "little guys" in business.

yogi
yogi

Thanks for your response, I live in a state with no sales tax, so I have no idea what other states are currently taxing what on the net. So my question was really just out of curiosity.

bobell
bobell

@Ivy_B Most states with sales tax probably already have software that enables merchants to charge the proper tax on each item.  I wonder how much computer power the average business needs to install and run the stuff.  I wonder even more how some outfit with a few millions in mail-order sales nationwide is going to manage forty-some different sets of sales tax software.  I can't even get Outlook to run on my home computer (which turned out to be a blessing, but that's another story).  I guess I'll never go into retail.

Ivy_B
Ivy_B

@tommyudo Thanks. I'm a librarian and I know Abe Books well. Alas, what I buy are mystery best sellers because I collect those in first edition, so it's Amazon for me. Apart from that, I would second your Abe Books recommendation.