Last week, the Senate voted on the Marketplace Fairness Act of 2013, a bill that would require online and mail-order businesses to comply with the same tax withholding requirements as in-state brick-and-mortar businesses. The bill had strong bipartisan support and was passed by a vote of sixty-nine to twenty-seven in the Senate. However, the bill may face opposition in the Republican-controlled House of Representatives, since some consider the bill a tax increase.
Yet, internet and mail-order buyers have always owed taxes on their purchases. Many states require shoppers to pay unpaid sales taxes when they file state tax returns, but few people actually comply. These buyers either ignore their obligation to pay taxes on purchases from out-of-state and online retailers, or they are simply unaware of such tax obligations.
Instead of holding buyers responsible for paying sales tax on internet and mail-order purchases, the bill imposes obligations on all types of sellers to withhold sales taxes.
If signed into law, the Act would shift tax-paying responsibility away from buyers, and back to the sellers, as is the norm with purchases from brick-and-mortar stores. Instead of holding buyers responsible for paying sales tax on internet and mail-order purchases, the bill imposes obligations on all types of sellers to withhold sales taxes.
Under current law, states can only require sellers to collect sales taxes if the store has a physical presence—either a distribution center or a physical store—in the state. This means that out-of-state internet firms need not collect sales taxes while stores with an in-state presence must.
The result is that online sellers can often charge lower prices than brick-and-mortar retailers because they are rarely forced to account for sales tax. This unfairly disadvantages in-state “mom and pop” stores as well as large online retailers like Target.com and Bestbuy.com. Because of their stores being physically located within a state, these retailers must collect sales taxes on their internet sales.
Even after taking these and other possible consequences into account, the Act will likely produce more positive results than negative.
In terms of online businesses, there are significant players on both sides. After years of opposition, Amazon.com now embraces enactment. After all, Amazon.com is already collecting sales tax in the nine states where it has warehouses. Overstock.com and eBay, on the other hand, are largely opposed to enactment.
eBay is lobbying for a larger exemption for small businesses. Currently, the Act exempts all businesses with less than $1 million in online sales per year. John Donahue, Chief Executive Officer of eBay, has proposed that small businesses with less than fifty employees or less than $10 million in annual out-of-state sales should fall within the exemption.
Limiting the exemption to businesses making less than $1 million in annual revenue may cause small business owners to rethink the quantity or type of products they are willing to sell online. Business owners may choose to decrease the quantity of products for sale in order to fit within the exemption, reducing products available to buyers online. Even after taking these and other possible consequences into account, the Act will likely produce more positive than negative results.
States could have collected more than $11 billion in online sales tax revenue last year.
A study conducted by the University of Tennessee in 2009 reported that states could have collected more than $11 billion in online sales tax revenue last year. The study (pdf) is broken down by state and indicates that an estimated $213.8 million would have been collected last year in North Carolina alone. Some states could use this lost revenue to balance their budgets, while others could use the revenues to lower their respective sales tax rates.
Delaware, Montana, New Hampshire, and Oregon are the only states that do not collect sales taxes. While Alaska does not have a state sales tax, it does collect local taxes. Senators from Montana, New Hampshire, and Oregon are opposed to the bill. Organizations such as the Heritage Foundation and Americans for Tax Reform, which believe the bill will hurt small online businesses, are also opposed.
Opponents point to the administrative costs of calculating and distributing tax withholdings as a major burden on small businesses. However, the administrative burden on sellers seems to be minimal. Under the Act, states that want to collect online sales taxes would be required to provide retailers with free computer software in order to calculate taxes based on where shoppers live. States must also establish a single entity to receive internet sales tax revenue, so that retailers do not have to send the tax withholdings to individual counties or cities.
Congress, acting pursuant to its authority, introduced the Marketplace Fairness Act to guarantee that all sellers would be subjected to the same withholding requirements.
A 1992 decision by the Supreme Court of the United States confirmed Congress’s authority to pass legislation like the Marketplace Fairness Act. In Quill Corporation v. North Dakota, the Court ruled that North Dakota could not require out-of-state sellers to collect sales taxes if the seller had no physical presence in the state. Quill Corporation was selling office equipment and supplies by conducting a classic mail-order business. Although Quill Corporation advertised in North Dakota, sent catalogs to North Dakota households, and shipped purchased goods to North Dakota customers, there were no salespersons, stores, or any other physical presence in the state.
Despite the ruling, the Court made it clear that Congress had the authority to pass legislation implementing alternative tax-withholding obligations on sellers. With internet sales skyrocketing in the last few years, legislators realized that tax revenue was being lost, and sellers were not being treated equally. Congress, acting pursuant to its authority, introduced the Marketplace Fairness Act to guarantee that all sellers would be subjected to the same withholding requirements.
With passage by the Senate, the bill has overcome one hurdle, but the House poses a final obstacle. Majority Leader Eric Cantor, R-Va., controls the House of Representatives’ schedule but has not yet set a date for the House to vote on the bill. President Obama supports the legislation and has indicated he will sign the bill into law if given the opportunity.