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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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.”