Online Sales Tax

A bill creating the first national legislation for states to collect online sales tax will become law next year according to Senator Richard Durbin. Sentor Durbin, who is co-sponsoring the bill with nine other senators from both parties, said he wants to hold a Senate committee hearing, possibly before Christmas on the measure. Senator Lamar Alexander, who is also a co-sponsor of the bill, has been trying for years to overturn the court decision legislatively. He predicted that the bill would pass Congress because it is a bipartisan endeavor and is more flexible than previous efforts. The bill is similar to legislation introduced last month in the House.

The bill, called the Marketplace Fairness Act, would enable state and local governments to collect an estimated $23 billion in tax revenue each year for online, catalog and other so-called remote sales.

Currently, if an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales in that state. This rule is derived from a 1992 Supreme Court decision, Quill v North Dakota, which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it. When consumers are required to pay tax directly to the state, it is referred to as "use" tax rather than sales tax.

The only difference between sales and use tax is which person -- the seller or the buyer -- pays the state. Theoretically, use taxes are just a backup plan to make sure that the state collects revenue on every taxable item that is purchased within its borders. But because collecting use tax on smaller purchases is so much trouble, states have traditionally attempted to collect a use tax only on big-ticket items that require licenses, such as cars and boats.

The severe economic problems of many state and local governments have forced many state legislators to develop new methods of raising revenue without raising personal, business or real estate taxes. As a result, online sale tax seems to be viewed as a source of untapped revenue.

But as online retailing has grown over the last decade, states have been trying to solve the problem on their own by expanding the definition of physical presence to include third-party affiliates, typically in-state websites that earn commissions by providing links to Amazon and other out-of-state retailers

Amazon, which has fought such efforts in other states such as Hawaii, Rhode Island, North Carolina, and many other states has agreed to begin collecting sales tax in Septenber 2012 as a a compromise with Califirnia. The compromise Amazon struck with California was that California’s tax would take effect on September 15, 2012 only if the federal government does not pass a federal online tax measure.

Ebay which opposes the Market Fairness Act has stated "this is another Internet sales tax bill that fails to protect small business retailers using the Internet and will unbalance the playing field between giant retailers and small business competitors. It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity.”