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How the Internet Sales Tax Will Affect You

By Eric Misterovich

Thanks to lower prices, the convenience of shopping from home, and the ability to read reviews from recent purchasers, more and more people are shopping online.  In fact, online retail sales are expected to reach $327 billion by 2016 in the United States alone.  One reason online retailers have lower prices than brick and mortar stores is because online retailers, for the most part, are not required to collect state sales taxes on purchases.

Since the 1992 Supreme Court decision of Quill Corp. v. North Dakota, states can only require online retailers to collect sales tax for online purchases if the retailer has a physical presence in the state.  As consumers, we are expected to keep track of our online purchases and pay the sales tax when we file our state tax returns.  However, most people do not report and pay these taxes.  The Michigan Department of Treasury estimated a loss of $414 million from unreported online sales in 2010.

In response to lost revenue and pressure from traditional brick and mortar stores, the Senate passed the Marketplace Fairness Act earlier this week.  The bill passed with bipartisan support with a vote of 69-27.  The bill would give states the power to require online retailers without a physical presence in the state to collect sales tax on online purchases.

Proponents advocate that the bill levels the playing field between online retailers and traditional brick and mortar stores.  Additionally, the bill would bring added revenue to states.  They claim the bill should not be viewed as a tax increase, since consumers are already supposed to keep track and pay sales taxes on their online purchases.

Opponents claim the bill will dissuade new online retailers from opening.  The current environment allows an entrepreneur to explore the marketplace with minimal risk and regulation.  Opponents also argue that the bill would give states too much control over out of state businesses and would expose businesses to the possibility of out of state audits, liens, and lawsuits.

The bill is headed to the House with an uncertain future.  Speaker Boehner stated that he would refer the bill to the House Judiciary Committee, where Chairman Bob Goodlatte has expressed openness toward the bill.  Goodlatte still has some concerns and would like to simplify the bill to make compliance easier for online retailers.  Currently, the bill would only affect online retailers with over $1 million in annual sales, but the bill could be revised to increase that threshold to $10 million.

If adopted, this bill will certainly have an impact on both your online shopping habits and your wallet.  However, a level playing field could help some struggling brick and mortar businesses.  The bill might also help solve the problem of “showrooming,” where customers test out a product in a brick and mortar store but ultimately purchase it from an online retailer at a cheaper price.  This bill is one to keep an eye on, and we will be sure to keep you posted once its future becomes more certain.

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