Will Online Sales Be Taxed?

Will it or won’t it? Congress has debated creating an Internet sales tax for years. In 1992, the Supreme Court even granted Congress the ability to pass legislation enforcing this specific type of tax collection. With Congress and lobbyists arguing various proposals, no law has ever passed. That could be headed for change next week..

Under the current legislation, businesses with $1 million or more in annual online retail sales would be required to remit sales taxes to the taxing officials where buyers reside. The amount would be calculated based on the sales tax rate in effect at each buyer’s location. Currently, Internet sales are only taxed when the seller maintains a physical presence in the buyer’s state.

Senate Bill 743, which has gained bipartisan support and is cosponsored by 29 senators, has been in discussions for months and advances for a final Senate vote next Monday. It requires states to simplify their sales tax assessment policies so as to not create an undue burden on sellers, and would require states to provide free software to businesses to compute the tax for each sale.

So what would an Internet sales tax mean for Loudoun entrepreneurs? It depends on who you ask.

Key supporters of the legislation include the National Governors Association, large traditional retailers, business associations, large online sellers with existing facilities in many states (who are already collecting sales taxes in these states) and small stores with physical retail locations. They argue that bill passage would even the playing field for storefront businesses currently required to charge sales tax on every transaction. They add that online startups and small-revenue businesses would not be affected, and that the legislation isn’t creating a new tax – but rather merely enabling the collection of more than $23 billion in taxes currently left uncollected.

“The Marketplace Fairness Act represents an historic compromise that was the direct result of the involvement of multiple stakeholders, including members of Congress, the national business community, consumer advocates and state government leaders,” says Loudoun Chamber of Commerce President Tony Howard. “With this legislation, local retailers and their customers will enjoy a more equitable competitive environment, while the states will be able to secure a new source of needed revenues, which in Virginia will be invested to improve our roads, ports and railways.”

Conservative anti-tax associations say that the Marketplace Fairness Act allows states to reach beyond their taxing borders, in effect creating taxation without representation. They add that the bill is a monopoly builder that will kill small business with complicated tax filing requirements. They add that the addition of sales tax will cause small businesses to lose online sales, as shipping costs combined with sales tax will remove any savings they currently give to online customers. Larger businesses (such as Amazon, a bill supporter), in contrast, would easily be able to absorb any potential loss in sales because of the volume of business they enjoy.

Those fighting the legislation also include online business groups and eBay, which wants the taxing threshold for minimum revenue raised to $10 million to exclude more businesses. “For small businesses, there is nothing fair about the Marketplace Fairness Act. The legislation stems from a fight between big bricks-and-mortar national retailers and big online retailers, all of whom seem unconcerned that small enterprises — and the jobs they create — are going to be collateral damage,” eBay CEO John Donahoe wrote in a public letter in the Wall Street Journal April 22.

The full legislation is online and analysts predict it will pass the Senate, with a more difficult passage possible in the House.