Many web-only retailers are bracing for change, as U.S. Congress likely will be enacting a law that will require them to collect state sales tax in the near future. While Internet retailers have benefitted from a 1992 U.S. Supreme Court ruling that exempted them from collecting sales tax if they didn’t have a brick and mortar presence in the state of the purchaser, state governments have not. A University of Tennessee study estimates that revenue lost to state and local municipalities for 2012 is $11.4 billion, and the National Conference of State Legislatures estimates $23 billion is lost in new revenue each year. Many argue that this is tax revenue that consumers should already be paying. Several organizations that represent retailers, including The National Retail Federation (NRF), are arguing for a level playing field, where web purchases, just like offline purchases, are subject to sales tax.
Two bills currently being considered by Congress, the Marketplace Equity Act and the Marketplace Fairness Act, would allow state governments to require retailers in other states to collect and remit sales tax on purchases. The Marketplace Fairness Act, introduced in the U.S. Senate by Sen. Mike Enzi, R-WY, requires states to create a “Streamlined Sales and Use Tax Agreement,” which assigns a state-level agency to collect and administer taxes and provides a single audit and single tax return for all state and local jurisdictions. It also requires retailers to use the sum of state and local tax rates to determine what’s owed, and tasks states with providing adequate software and services for them to pay taxes. Retailers with less than $500,000 in sales per year would be exempt from the federal act. Small retailers are also exempt from penalties for mistakes made during the tax collection process. The bill is awaiting action from the Senate’s finance committee. The Marketplace Equity Act of 2011, introduced by Rep. Steve Womack, R-AR, also requires states to designate a single entity to collect online sales taxes. That act exempts smaller businesses with sales of less than $1 million nationwide, or $100,000 statewide. At present, 26 states meet the requirements of the Marketplace Equity Act. The Retail Industry Leaders Association (RILA) says both bills have bipartisan backing and stand a good chance of passing when Congress returns from summer recess.
Many small e-retailers say they don’t have the resources to manage tax collection or the sales volume to charge tax, adding from six to nine percent to final cost, and still offer competitive prices. But tax proponents contend that automated tax software programs have been used for years when dealing with out of state transactions and should be a simple fix for online companies to implement the technology and comply with the law.
Another big question is whether consumers will buy less online if they have to pay sales tax. A 2010 study by e-commerce technology company GSI Commerce, a unit of eBay Inc., found that one retailer took a 12 percent hit to sales after it started charging sales tax. A study by Forrester Research Inc. and Bizrate Insights found that eight percent of online shoppers say sales tax makes a big difference in whether or not they buy online. Still, online shopping offers other advantages over in-store shopping, such as saving time and gas money, and 24/7 shopping, which will undoubtedly factor into the equation.