Tip: Get Ready for Possible Internet Sales Tax Law

It’s been a long time since the topic was first aired, but the issue is far from dead. The much-debated Internet sales tax law continues to advance in Washington. If authorized, the new tax law would take an estimated additional $12 billion to $23 billion a year out of consumers’ wallets for online purchases. It would allow the 45 states and the District of Columbia to demand that online retailers collect sales tax on purchases.

Here’s a quick update on the current status and some thoughts on what might happen under new legislation.

• Under Current Law

  States can require online retailers that have a physical presence in their states – a warehouse, a factory or even a factory store – to collect sales tax on purchases made by residents of that state. Individuals who buy goods online are supposed to pay sales tax in their home states on those purchases. Because this law is essentially impossible to enforce, little is done to collect these taxes, and it is estimated that less than 1 percent of all buyers comply with this law.

• Under the Proposed Law

  Sellers with more than $1million a year in sales would collect the tax from buyers in various states and be responsible for paying sales taxes to those various states. It is likely they would pass the cost on to consumers. With a rate of 7.5 percent, California has the highest state sales tax rate; however, the addition of local city taxes raise the overall sales tax total to about 10 percent in some areas.

  It is difficult to determine how much would be generated by this new sales tax. A recent study has suggested about $12 billion, but many retail experts believe that this is estimate is low.

• The Status of the Bill

  The legislation has support from both Republicans and Democrats. The Senate Finance Committee chairman has successfully prevented the legislation from advancing, but the Senate Majority Leader has taken steps to bypass the Finance Committee and bring the bill before the Senate for a procedural vote. If the bill proceeds, passage in the House is by no means certain, though the proposal does have bipartisan support.

• Who Supports the Proposed Legislation?

  The most vocal supporter is perhaps the National Retail Federation, whose membership wants to see legislators level the playing field for their online competitors. Interestingly, Amazon, the largest online retailer, is also behind the bill. Because of the expansion of its bricks-and-mortar warehouse network across the country, Amazon already levies sales taxes on its online purchases. Just like traditional retailers, Amazon doesn’t want to see online retailers with a smaller physical presence gain a competitive advantage.

• Who is Fighting the Bill?

  Online retailers claim the proposal would create a compliance nightmare, and that sales taxes would inhibit their sales. EBay’s CEO John Donahoe, who opposes the proposal, has suggested that if the bill moves ahead, it be applied only to companies with $10 million or more in annual sales or to e-tailers with at least 50 employees.

Retail industry experts anticipate this proposal will have a rough time on Capitol Hill. They believe our elected representatives won’t support a measure that consumers might view as more taxation.  Others shudder at the thought of online merchants trying to collect taxes according to the various requirements of the states where their customers reside. 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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