The first thing online retailers need to know about charging and collecting online sales and use tax (aka Internet taxation) is that it is coming. Here’s why:
The value of goods purchased online grows. According to the U.S. Department of Commerce estimates, 2012 online sales reached $225.5 billion. More retailing dollars switch from dollars exchanged locally to money sent to online retailers, sales tax revenue collected by States continues to drop.
According to estimates from the National Conference of State Legislators, the sales tax revenue that state did not collect was $23 billion. California’s State Board of Equalization estimated that the state in 2010 lost more than $1.1 billion in uncollected use taxes. This estimate is three years old, and it is still huge. Pools of money like these are just too large for cash-strapped governments to ignore. Governors want the online sales tax revenue, while powerful retailing organizations want a level playing field with their online competitors.
Even Hollywood hasn’t ignored the Internet taxation issue. As early as 2007 in Robert Redford’s Lions for Lambs. Senator Jasper Irving (Tom Cruise) ends an interview with reporter Janine Roth (Meryl Streep) with this line, “Now, to tax Internet transactions, or not tax internet transactions…”
The will of the majority in the Washington, DC halls of power seems to firmly be on the side of taxing Internet transactions. The actions of lawmakers in the last two years seem to prove that.
What’s driving the online sales tax debate?
The percentage of the retailing pie spent online continues to grow. Internet transactions are currently only taxed in those states where an online retailer has a physical presence. Billions of dollars of online transactions do not currently generate any tax revenue for states. States need to raise more money. Brick and mortar retailers and powerful lobby groups are crying “unfair.”
What online sales tax laws have been proposed so far?
Since 2011, there have been four major Internet taxation legislative proposals. The first bill, S. 1832, was introduced in November 2011. The three subsequent bills are collectively known as the Marketplace Fairness Act. S.336 and S.743 were introduced respectively into the Senate in February and April 2013. H.R. 684 was introduced into the House in February 2013. Basically, they would all require online sellers to collect sales and use taxes as brick and mortar businesses are required to do, and remit them to states in which the goods are delivered.
Who are the players?
In favor of Internet taxation:
You’ve got state governments, ecommerce giants like Amazon, brick and mortar retailers (Target, etc.), and their trade groups (National Retail Federation). In the political category, you can find both Democrat and Republican supporters, including GOP state governors such as Rick Snyder (Michigan), Robert Bentley (Alabama) and Bill Haslam (Tennessee).
Against Internet taxation:
Online-only retailers, and marketplaces like eBay. Republican and libertarian politicians such as Kentucky Sen. Rand Paul and Texas Senator Ted Cruz. Anti-tax activists like Grover Norquist. People who think the proposed laws run afoul of the United States Constitution.
What are their respective positions?
It is a heated debate. It is also particularly troublesome for Republican politicians who have to juggle economic realities and the ideological beliefs, and positions advocated by some of the most high-profile party members and supporters under the Republican umbrella.
Arguments in favor of Internet taxation:
1. States should have the authority to require out-of-state retailers to collect and remit sales and use taxes on purchases shipped into the state.
2. Online sales taxes will help retailers with a physical presence in sales-tax states (all but Alaska, Oregon, New Hampshire, Montana and Delaware) compete with online retailers.
Arguments against Internet taxation:
1. It is a “21st century version of taxation without representation,” according to Florida Republican Rep. Ron DeSantis.
2. A new online sales tax will stifle small online businesses.
3. It is unconstitutional because it overrides due process protections.
What is the timetable to implement Internet taxation?
It depends on how the respective sides marshal their supporters.
In our next post, we’ll explore the nuances of the Marketplace Fairness Act through a guest post from Avalara. Avalara provides services to help business of all sizes comply with sales and use taxes. We’ve just formalized a partnership agreement with them, and we’re looking forward to their assistance in helping our customers navigate the online sales tax waters.
