Five Things You Should Know About the Online Sales Tax Bill

By :: April 23rd, 2013

The Senate is close to passing a bill that would let states require online and catalogue sellers to collect sales taxes on the products they sell. Congress has been struggling with this issue for decades, yet few disputes have generated as much confusion and misinformation as this one. To help separate myth from reality, here are five things you should know about what the Marketplace Fairness Act of 2013 does, and does not, do.

It is not a tax increase. In most states, if you buy a good or service subject to sales tax you already owe the tax whether you purchase online or in a store. The dispute is merely over who collects it. If you buy on Main Street or in the mall, the seller collects the tax and remits it to the state. If you buy online and the seller does not collect the tax, you still must pay an equivalent use tax when you file your state income tax return.

True, almost no one does this and states rarely enforce their use tax laws, but that’s not the point. Legally, you already owe the tax. Fundamentally, this is a matter of tax compliance, not tax levels.   

It is a back-door way for states to collect more tax revenue. While it isn’t a tax hike, it clearly will generate more revenue for states. But if you think taxes are too high or government is too big, then you should try to get states to lower or even repeal taxes. Indeed, making online sellers collect taxes ought to make it easier to lower tax rates.   

It is not an “Internet tax.” The bill does not give states the power to tax access to the Web, the cloud, or even securities transactions, as some fear. All sorts of interests have raised the specter of a digital camel sticking its nose under the tax tent. But there is nothing in the bill that gives state the authority to tax this other stuff. In fact, the bill’s Section 3 explicitly bars states from using the law to try to impose new levies on products or services that are not now taxed.

It will not complicate life for buyers. In fact, it will simplify their lives. Those few of us who pay the use tax will finally be able to throw away our receipts. And while today almost no one can keep track of what is taxable and what is not, the law encourages states to participate in a multistate effort to simplify sales taxes.   

It will not burden online sellers. The law exempts firms with less than $1 million in sales from collecting sales taxes. It requires states to provide sellers with the information they need to determine rates in multiple jurisdictions. It even requires states to give sellers free software to calculate the tax. And, if that isn’t enough, credit card companies and payment firms such as PayPal can easily do this at practically no additional cost. There may, in fact, be no tax that is easier to collect.

Remarkably, Congress has failed to solve this problem for nearly a half-century. The Supreme Court first recognized tax complexity problems for interstate sellers in 1967. In 1992, in a case called Quill v. North Dakota, the High Court practically begged Congress to sort out the mess. In 1999, Congress responded by doing what it often does when it doesn’t want to tackle a problem. It created a commission.

Finally, 21 years after Quill, the Senate may finally address the issue. It remains to be seen whether the  House, dominated by tax-phobes, will do the same. But after two decades, it is long past time for Congress to sort this out—and get past the myths that delayed action for so long.           

 

39Comments

  1. Anony2623456  ::  1:24 pm on April 23rd, 2013:

    A better law to pass would be one that would prohibit states from taxing transactions that occur outside their borders, both via the mechanisms this legislation dictates, or through the so-called “USE TAX”.

    If I go to another state where they don’t have a sales tax, and I buy an inkpen, or a book, or a TV, or whatever, and bring it home to my state, it is complete and utter BULLSHIT to say I owe my state’s government a percentage of that transaction.

  2. Ralph H  ::  2:39 pm on April 23rd, 2013:

    Oh its not as easy as you indicate. For example, locally Pittsburgh and Philadelphia have higher tax rates than the rest of PA. Also, if we sell a pump to a non-profit in PA it is taxed, whereas not the case in NJ. DE has no tax. some states tax groceries and paper products, whereas others do not.

    While Amazon can certainly comply, a smaller company (like mine) with an office staff of two cannot install 50 states software and possibly keep track adequately. FYI, typically the tax calculation is integrated into your accounting system and tied to sales order. Its not so easy as using a state supplied software package as the result must be integrated into the accounting.

  3. DigmaPhi  ::  3:16 pm on April 23rd, 2013:

    Ralph- If your sales are under $1 million, you don’t need to worry about it per the text of the law. If they are over $1 million and your accountant can’t handle something that simple, particularly with the required simplification supplements, your accountant is incompetent and should be fired.

    Anony- Your analysis is overly simplistic in one respect and a misunderstanding of the law in another. The overly simplistic part: transactions aren’t tangible; they don’t “occur” inside or outside borders. When you place an order from your computer in Texas from a company in Indiana, the transaction doesn’t “occur” in Indiana anymore than it occurs in Texas (technically, it occurs in neither–it’s a category error to say that it “occurs” in a physical environment). The law part: sales taxes are charged to the purchaser, not the seller, they just happen to be collected by the seller, so even if you ignore what I just wrote, you’re still clearly within the state’s sovereignty for taxing the transaction. You would have known this had you read either the bill, any states’ sales tax rules, or, sadly, the post you replied to.

  4. Ralph H  ::  5:19 pm on April 23rd, 2013:

    I am aware of the exclusion and it does not apply. If you had experience in a small to mid size business, you would know that order entry is typically done by sales or clerical personnel. Your accountant is not involved. I also have had the delightful experience of going through a sales tax audit, where the issue of particular sales (whether or not they were taxable) came up. When asked directly the auditor would not give an answer to “what ifs”. There is no such thing as the government giving a “simplified supplement”, especially a potential of 50 different ones, plus local municipality variations.

  5. AMTbuff  ::  9:44 pm on April 23rd, 2013:

    $1M in sales (which might be only $20,000 in profit) is too low a threshold relative to the compliance cost, especially for companies located in states with no sales tax.

    As to the claim that it is not a tax increase, that’s a distinction without a difference.

    I predict growth in Craigslist activity and in non-power sellers on eBay. They will gain a cost advantage much larger than the normal profit margin.

  6. Tax Roundup, 4/24/2013: Maxed Out. And: Internet sales tax vote looms. « Roth & Company, P.C  ::  9:20 am on April 24th, 2013:

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  8. Michael  ::  5:28 pm on April 27th, 2013:

    I already pay 20% of my income in CT state/local taxes, while those darn 1 percenters have a state/local tax burden of closer to 7 percent. Of course, the poster boy for avoiding his state’s sales tax happens to be John Kerry. I have absolutely feel no guilt or any responsibility to report my use tax. My household income is less than 10% of the President’s, but my federal/state/local tax burden is higher than the President of the United States personal tax burden, so my conscience is clear.

  9. Sean  ::  1:56 pm on April 30th, 2013:

    Sorry but your article is plain one-sided and not even accurate. Online tax reporting and compliance would be tremendously difficult. How would you like a law that required you to collect and pay a different “web visitor” rate depending on where the reader was located and what your article was about, only to find out that some articles you wrote would be classified differently in 10,000 separate locations?

    While this seems like a far-fetched scenario it isn’t for a small online business owner. Small business owners should not have to comply with this law because it is really flawed.

    1. The States and local jurisdictions are supposed to enforce use tax laws but do not, so they are going after businesses to do it for them. The question is why aren’t they? It’s probably because it is complicated, not very popular and costly for them to enforce it. So, why should they pass a law that makes it complicated, unpopular and costly for businesses to do what the government failed to do?

    2. Brick & mortar businesses are not at a disadvantage. They CHOSE to open a brick & mortar shop. They could have and still could ALSO sell online. There are many instances where consumers get the “free” research online and then go shop locally so they can buy in person.

    3. This is partially age discrimination. Most brick & mortars are owned by older individuals whereas online stores are started by younger people. Just because brick & mortar store owners lack innovation doesn’t mean they should stick it to online businesses. This should never be an argument in favor of this law.

    4. States can easily agree on a simplified rate and classification scheme and most online sellers would drop their arguments against it. However, states are so ineffective that they cannot even agree on simple tax rates. How are we supposed to be led to believe that they can magically repair their finance situation just because they have more taxes now when they are such a mess now?

    5. The estimated 22 billion saved is easily dwarfed when compared to the billions we give Pakistan, Egypt, etc. Maybe the government can stop handing out free money to the world and they would have more to share with the states that say they need it. That’s just an idea.

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  11. Michael  ::  10:45 am on May 8th, 2013:

    Mr. O’Bama and Congress are in a mood to bang it to the lower middle class, working poor, and retired. The Marketplace Fairness act is a regressive move on people with modest means. Using Chained CPI to adjust the tax brackets is another regressive move since the 1 percenters receive, by far, the biggest raises (expressed as an percentage of income). The retired can expect Chained CPI on their Social Security and higher Medicare premiums. By the way, the average senior is living high-on-hog with an average 15K of Social Security income. If all this is going to happen, then to be fair to truly spread the pain, all earned income should be subject to the Social Security payroll tax, and all income should be taxed the same.

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  13. Michael Bindner  ::  2:37 pm on June 26th, 2013:

    Doing this is a good idea, although a better idea is shifting to a VAT and a VAT-like Net Business Receipts Tax (which transfers most deductions from personal income taxes to the business – including an expanded child tax credit).

  14. Supreme Court opens the door for online sales tax – Kerala Lawyer  ::  3:47 am on December 5th, 2013:

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  15. Annoula  ::  7:57 pm on February 2nd, 2014:

    ” … It will not complicate life for buyers. In fact, it will simplify their lives … ”

    Uh, seriously? Are you kidding me? Part of the great allure of shopping at Amazon.com is that we haven’t had to pay state sales tax. Now we suddenly have to tally up all of our yearly purchases on this and every site from which we purchased and fork over the sales tax to our state? You call this simple? How does this keep up from having to save our receipts? You sound like a typical tax-and-spend Dem to me, dear author.

    And on a more logistical note: I’m in Indiana. So, do I owe use tax for the whole year or only for the months after which the law was passed in our state?

  16. Annoula  ::  8:00 pm on February 2nd, 2014:

    I’m sorry to be hard on you, dear author, and even to call you a typical tax-and-spend Dem. That’s not fair to you and I’m sorry to insult you. But very little of this tax-to-deathing ever reared its head in our backyard until our country lost its wisdom and elected Obama.

  17. Sam  ::  8:14 pm on February 13th, 2014:

    You technically already should be tallying up every online purchase. Every state with a sales tax also has a use tax. Only around 1.6% of people actually pay it. Mostly because no ones knows about it. Use taxes are basically sales taxes on items you did not already pay sales tax on. This includes mail order, phone order, internet order and even physically buying something in another state. Use taxes are not new. When a state’s sales tax became law, so did its use tax. So, technically, almost all of us are tax evaders. A law requiring the seller to collect this tax on internet sales would actually make the consumer’s life easier because it would put us all in compliance with laws we have all been breaking our whole lives without even knowing it. I am not saying anything political here or stating whether I agree or disagree with anything or anyone. These are just the facts.

  18. MHJ  ::  12:22 pm on March 13th, 2014:

    I just love it when people who do not run a business say how some change in law will not have any deleterious effects on said business. Big spenders of both parties are especially good at knowing all about every business’ operations and what will or will not affect them. Extreme case in point: Obamacare. But he rot goes much deeper and is much older than that.

    I would like to hear from various trade organizations and specific businesses what they think about whether this will burden them, and why they think the way they do. And I suspect that the answer will be that it will be a burden, maybe only a little, but the devil is in the details and those state-provided software (from 50 different States plus DC and Puerto Rico) packages are a huge concern that could crash a whole payment and billing system.

  19. marie  ::  11:11 am on July 28th, 2014:

    Amazon started collecting taxes in many states and they have had a sales slump and it is on going.I don’t shop there anymore either.

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  38. Aleksandr  ::  3:34 pm on January 23rd, 2015:

    So who actually has to pay the tax? My brother (who lives in a different state, and did not work last year) used my account to ship items to his house. I get a bill for the use tax. I looked up the laws, and it says that the people who use them must pay the tax. How do I figure out which of us has to pay it, and how?

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