Are We Creeping Closer to an Internet Sales Tax?

Like you didn’t see this coming… Sen. Dick Durbin (D-IL), together with Sen. Mike Enzi (R-WY), will, if all goes according to plan, announce intentions to impose a sales tax on internet sales. The bill, referred to as the Main Street Fairness Act in the Senate, is a companion piece to legislation bearing the same name currently stalled in the House.

The legislation is billed as intending to level the playing field between internet retailers and retailers who have an actual physical presence inside of a given state. “Why should out-of-state companies that sell their products online have an unfair advantage over Main Street bricks-and-mortar businesses?” Durbin asked recently in his home state of Illinois.

It may sound noble (and arguably, there are some real fairness issues at play here) but you and I know this is really about dollars. It’s estimated that requiring online retailers to collect sales tax from would result in revenue totaling a whopping $37 billion over a three year period.

Yowza.

But don’t count it as a win just yet. Those billions of dollars have a lot of faces behind them. Opposition to the bill, which hasn’t even been officially introduced, and its companion in the House is already growing, led by, not surprisingly, online retailers and legislators in states like California, which rely heavily on tech and online businesses. Cue Rep. Dan Lungren (R-CA) who has introduced the Supporting the Preservation of Internet Entrepreneurs and Small Businesses Resolution (yeah, the name cracks me up, too) which would block the imposition of any sales tax on online sales. H.R.5 which was introduced in early February 2011 currently sits in the Subcommittee on Courts, Commercial and Administrative Law.

So what does any of this mean? Really, nothing for now. Both sides are, I’m sure, lawyering and lobbying up. While nobody knows for sure what the outcome will be, I think we can all count on some kind of compromise bill eked out over time. A long time.

Comments

  1. Tammy Cravit

    I wonder if Rep. Lungren’s bill would change the fact that businesses in California have to file Use Tax returns and, in effect, pay sales tax on purchaes made out-of-state and/or online. Or is Rep. Lungren okay with making us small business owners carry the burden of reporting and paying this tax, instead of wanting online retailers to have the burden of collecting and remitting it? Interesting stuff, in any event, and I know I’m not the only one watching the issues with interest.

  2. Robert

    So…if you order something over the phone or via mail from an out-of-state vendor, will this also be affected?

    And what tax rate do you pay if you’re shipping a gift to someone? Your rate or theirs?

    Having a simple tax on internet transactions would not level the playing field as the states that pay lower sales tax vs high sales tax would cause a disparity.

    Plus…realistically, you can change your billing address at will online on all credit card accounts. What would stop you from changing it, ordering something, sending as a gift to myself where I live, then changing the address back?

    If so….suddenly, I would have a billing address in any state without a sales tax, right?

  3. Beatrice Vaccaro

    The bill would not “impose a sales tax on internet sales”. Sales tax is already due on Internet sales. Right now consumers are supposed to calculate the tax due themselves and remit it directly to the state where they reside.
    All the proposed bill would do is shift the burden of calculating, reporting, and remitting from consumers to retailers.

    Congress should finally resolve this issue as a basic matter of fiscal responsibility – and the states cannot do it on their own (no matter how hard they are trying with all the Affiliate Nexus legislation attempts now passed in 5 states, and pending in 8 more).

    These are not new taxes, or even an increase of existing taxes. The Main Street Fairness Act simply says, if you sell goods and services online, you must collect sales tax just like any other retailer.

  4. Author
    Kelly

    Hi Beatrice, I think semantics matter here. The obligation to pay tax on internet sales for the end consumer (not at the retail level) is actually a use tax, not a sales tax. In some states, that can be an important distinction.

    Nonetheless, I agree that the idea is to shift the burden of collection to the retailer rather than rely on the end consumer.

  5. Robert

    Another thing to consider…often, “shipping and handling” charges are obscenely higher than any sales tax, depending on the item. There have been plenty times I planned to order something on the internet, then faced the shipping and handling charges, and decided I would simply buy it local.

  6. Robert

    Would this law apply to orders made via mail or phone? Just curious…Does anyone know if the tax reporting applies to orders placed this way as well?

  7. Robert

    Also…how do you regulate private sales/auctions i.e. eBay? Maybe we should start taxing sales at Garage Sales…think of all the lost revenue there!!

  8. JG

    The most common argument made in support of a tax on Internet sales is to “level the playing field”. However, any state can immediately level the playing field by getting rid of any existing sales tax.
    It’s unlikely they will do so, so we can conclude that the real reason is the states want more revenue as usual.

  9. BeatriceVaccaro

    @Kelly – you are correct, it is a Use Tax when the end consumer files and remits the tax. Sorry about that mistake.
    @Robert – yes, would apply to all remote sales i.e. mail order, phone order and web. The way the bill was introduced last year and is expected to be introduced again this year, only states that are members of the Streamlined Sales and Use Tax Agreement (24 states so far with 4 more considering) could require remote retailers to collect sales tax for them. Also, the SSUTA has a small business exception set at $500,000 in remote sales, i.e. only sellers with over $500,000 annual remote sales (sales outside the business’ nexus states) would be required to comply and collect sales tax. So, an eBay seller would only need to comply if they were selling a very high volume.

  10. Mike Emeigh

    Robert:

    Here’s the language from the House bill (HR 5660).

    “Each Member State under the Streamlined Sales and Use Tax Agreement is authorized, subject to the requirements of this section, to require all sellers not qualifying for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to that Member State under the Agreement.”

    Private sales and auctions would likely fall under the small seller exception in many cases. Right now there are 24 states in SSUTA, see http://www.streamlinedsalestax.org.

  11. Mike Emeigh

    People don’t shop on-line primarily because they don’t have to pay sales or use tax; they shop on line because it’s convenient, they can shop when they want to shop, and they often have a broader selection from which to choose. The smoke screen about not paying sales tax on online sales being an unfair advantage is a red herring; this isn’t about maintaining a competitive environment for local brick-and-mortars, but about providing an easier enforcement mechanism for state governments to collect the use tax they are due. It’s a lot harder – and more expensive – to go after your state’s citizens individually than it is to go after a bunch of large corporations.

  12. Robert

    Mike:

    I agree….convenience, selection and availability tends to be major driving forces when ordering online…

    And many of the big online retailers charge sales tax already on top of shipping…

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