May 14, 2013

The Internet sales tax bill is simple, isn’t it?

Do you remember paying sales tax on that quick Amazon purchase you made before Mother’s Day, or on that quirky graduation gift you got on Etsy? Most of us don’t pay close attention to the money we spend online, happily clicking “Buy Now” without a glance. But recently, there’s been quite a stir from the Senate—they just passed the Marketplace Fairness Act which makes the Internet sales tax a lot more complicated than it used to be.

Last year, states lost $238 billion due to not being able to collect out-of-state sales taxes. $11.4 billion was from internet sales.

The Marketplace Fairness Act doesn’t just affect online sales, but also includes purchases made through catalogs, telephone orders, and radio ads. If the business makes more than $1 million in sales annually, they’ll have to start collecting sales tax.

You might not look closely at the payments you make on purchases, but other’s do. A lot of people have avoided paying sales tax by buying products online instead of in-store. For a long time, this didn’t matter. Online retailers didn’t make all that much money for sales tax to matter. Not only that, with 9,646 tax jurisdictions in the US, requiring online retailers to charge sales tax would not only be a hindrance, but an impossibly complex task.

It’s not as simple as knowing that the tax rate in Tennessee is 9.75%, and Michigan’s is 6%. If that were the case, it’d be relatively easy for retailers to find the rates of each of the 45 states and collect the tax accordingly. But with so many jurisdictions, counties and cities, specific items fall into separate tax categories. “In one jurisdiction, cotton candy is food; in another it’s entertainment or candy,” says Overstock.com CEO Patrick Byrne.

Figuring out and paying these out-of-state taxes has actually been the responsibility of the taxpayer. When filing state income taxes, under the section of “use tax,” filers are supposed to enter the dollar amount of products consumed in their home state if they were bought elsewhere or online. Very few people, though, actually remember or care to pay those taxes.

So what is the current law on Internet sales tax? In order to collect sales tax for internet purchases, the retailer or company has to have a physical presence in the state it’s selling to. This could mean a storefront, or a distribution center. If you purchased something online from Walmart, which has stores across the country, you paid the sales tax required by your state. But with a retailer like Ebay, you might live in a state that doesn’t have an Ebay office, and haven’t had to pay sales tax.

How would the law change affect me, the customer? If you live in a state like Oregon or New Hampshire that doesn’t have sales tax, and have purchases sent to your home state, you will continue to be sales tax-free. But for everyone else, you’ll have to pay as much tax on your online buys as you would if you went to a local store.

How would the law affect me, the seller? If you earn less than $1 million sales, you won’t be affected at all. If you earn more than that, well, you’ll have to start tracking (and updating) a lot of information. But, the bill says that states must provide free software to sellers, to help in determining the sales tax where each shopper lives. Additionally, states will have to provide a single entity to receive Internet sales tax revenue, so you don’t have to send out taxes to individual counties or cities.

When would this new law start? The earliest the new law could go into effect is October 1, 2013.

So, what’s the problem? Supporters say that the proposed law will “level the playing field” between online sellers and storefronts. If storefronts have to charge and pay sales tax, online sellers should as well, right? Most storefronts have an accountant, and only one set of tax laws to abide by. Giants like Walmart and Target can afford to sort through the laws and rates—they have entire departments dedicated to this.

“While it attempts to make tax collection simpler, it still has a long way to go,” Rep. Bob Goodlatte of Virginia said in a statement. “Businesses would still be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions.”

Online sellers are usually individuals, or small teams that can’t handle the expensive burden of collecting sales taxes from nearly 10,000 sales tax jurisdictions around the country. Small businesses aren’t easily able to hire extra manpower to go through thousands of transactions to determine how much tax goes to each jurisdiction. Also, most online retailers can’t afford to update their accounting software, or hire a programmer to update their shopping cart system to reflect the changes. If you have a lot of products, each product will have to be plugged into the new taxing software. There’s a good chance that the software provided by each state won’t work with every retailers digital shopping cart.

Allowing states to collect taxes from Internet sales, some worry, would give states too much power to cross state lines and enforce their tax laws. Some say that it’s nearly impossible to correctly collect sales tax for all states, all the time. Because of this, out-of-state businesses are more prone to being audited, not just by their home state, but by every state they sell to.

The issue of the Internet sales tax is a complicated one, and still has to get through the House of Representatives to become law. Supporters of the bill say that states are trying to make it easy for online sellers to collect taxes, and consumers to pay the taxes they’ve owed anyways. Opponents hold firm that the Marketplace Fairness Act isn’t fair at all, giving too much power to states and harming online commerce with complicated taxes.