Just when you thought things couldn’t get any worse for online retailers, Congress recently sponsored legislation to tax online sales. If passed, the Marketplace Fairness Act would allow states to collect sales taxes on all goods bought online—except for retailers who collected less than $1 million in revenue. Online businesses were spared this tax grab when in 1992 the Supreme Court ruled that state tax laws placed too big a burden for online retailers to collect and remit sales taxes.
As it stands now, states can only tax Internet retailers if they are physically located within the state’s borders. Cash strapped states have sought relief in online sales taxes for some time, especially since Internet sales have jumped from 1.6 percent of U.S. retail sales to more than tripling at 5 percent. Even that number is expected to rise as shoppers go increasingly mobile, boosting hand-held impulse sales. According to the Commerce Department, third quarter 2012 online retail sales rose to $57 billion.
Taxing online sales could severely impact major retailers who have been growing increasingly dependent on web-based revenues. Large retailers insist that new systems and software would be needed to collect the tax-driven mandated surcharges; small retailers claim the sales tax will level the playing field.
"While store owners collect and remit state and local sales taxes, their digital competitors are off the hook—and benefiting because of it," said David French, the National Retail Federation's senior vice president for government relations. Arguing against the tax, a National Center for Policy Analysis report notes that “The software needed to comply with these thousands of tax rules barely exists, and is often faulty and expensive. The burden on small online retailers of complying with 50 state tax regimes is a de facto barrier to entry and gives local retailers an unfair advantage.”
The National Conference of State Legislatures has proposed two sales tax collection scenarios:
This would impose a destination-based tax collected by the seller, but be awarded to the state where the product is being sent. Online retailers would have to “verify buyers’ home sales tax rates, creating a two-tiered system in which businesses are treated differently based on their business model,” notes the NCPA.
This option would rely on an origin-based system that collects and pays sales taxes to the state where the online retailer is based. This is similar to the physical-presence standard currently in place and would be easier to implement. Such a system would make it easier for states with differing tax rates to compete.
Whichever option is finally enacted, retailers should be prepared to set aside monies for systems and software to implement the new online sales tax and to adjust product pricing to accommodate the changes.
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