The new Marketplace Fairness Act, or “Internet Tax” will require online retailers to collect sales taxes for the states where they ship goods. If you’re a small business that purchases or ships any of your products online, these new taxes will affect you.
This article covers the basics of the Marketplace Fairness Act, so you can understand how it may impact your bottom line.
Currently, both consumer-level and B2B online shoppers have enjoyed purchasing products online mostly sales tax-free. Older laws required stores to collect sales tax only on goods shipped to states where they have a physical presence, such as a distribution center or a physical store. For example, if you purchased office supplies and software from Office Depot online, you would likely pay sales tax on your purchase. If, on the other hand, you made this purchase on Amazon you might get off scot-free when it came to sales tax.
Complication has been the main reason for not requiring these sales taxes in the past; deciphering all of the various tax laws for all 45 states that have sales tax was just too much of a burden for businesses.
Back in 1992, the Supreme Court addressed the issue, but Internet commerce was non-existent in those days. According to online sales tax advocates, current technology makes it simpler to collect sales taxes from various states. The so-called Marketplace Fairness Act urges state governments to provide companies with free software for calculating taxes and to establish one state entity to receive the payments.
You may be thinking that you’re paying sales tax already, right? In most states with sales tax, consumers who buy products online from another state must pay a Use Tax. They are supposed to track their online purchases and pay sales tax when they file their tax return. However, some consumers are not even aware of—or ignore—these requirements, which are difficult for state jurisdictions to enforce.
Supporters of the Internet Tax include big box retailers like Target, a mix of Democrats and Republicans, President Obama, the National Retail Federation, and even Amazon. While Amazon—as you might guess—was against the new tax for a while, the eCommerce powerhouse has changed its mind as its interest shifts into expanding its physical operations into more states. Apparently, Amazon realized the benefits of providing faster and same-day delivery from increased distribution centers outweigh the risk of requiring customers to pay sales tax.
Opponents include conservatives and anti-tax activists who claim the law will hurt small online businesses. However, one very big online business is leading the charge against the tax. eBay wants to protect its numerous sellers and would like the law to exempt any business that either has fewer than 50 employees or makes less than $10 million a year on out-of-state sales.
No matter which side you’re on, it’s hard to deny the numbers. According to the U.S. Department of Commerce, there were $225.5 billion in online sales in 2012. And, thanks to the current sales tax-free status, states lost a combined $23 billion in uncollected sales tax revenue.
If you live in one of the five states with no statewide sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon), you’ll get off easy on this one, too. People in these states won’t be charged on goods they have shipped to their home state. However, businesses won’t fare so lucky. They will have to collect sales taxes for items shipped to other places where there are sales taxes—in other words, most of the country.
In states with sales tax, businesses and individual consumers will have to pay the same amount of sales tax as they would buying a product in person at a brick-and-mortar store. You can use this tool to see how much something will cost under the new law by choosing a location and tax category.
The Marketplace Fairness Act is currently pending in the House, and the earliest it could go into effect is October 1, 2013.