Internet Sales Tax Is Coming

Category: Finance

Tax-free Internet shopping is in jeopardy. The U.S. Senate voted 74-20 on April 22 to take up a bill that would permit State and local governments to collect sales and use taxes from online sellers located outside of their borders. If this becomes law, how will it affect you? Here's my analysis...

The Internet Sales Tax: How Bad Will it Be?

Earlier this month, I published an April Fools edition which joked about new Internet taxes on emails, Google searches, YouTube videos, and downloads. But U.S. Senate Bill S.743, dubbed the Marketplace Fairness Act of 2013, is no joke, and will likely sail through the Senate on a final vote that may come this week. The House is another matter, being dominated by Republicans who oppose all “new” taxes.

But S.743 does not impose new taxes, say proponents; it only enables collection of taxes that are already owed, but few consumers pay. In most States, buyers are legally required to report taxable purchases and remit payment if the seller does not collect the tax. (Stop laughing!)

Sellers are conscripted as tax collectors because taxpayers cannot be trusted or policed. Currently, a State cannot require a seller to collect sales taxes unless the seller has a “nexus” or physical presence in the State. Some States have tried to stretch the definition of “nexus” to include affiliates of online sellers, prompting Amazon and others to terminate affiliates in such States. S.743 creates a framework within which States can require out-of-state online sellers to collect and remit sales taxes on purchases delivered to locations within the States. Its provisions address many concerns that businesses have about the burdens of processing sales taxes for tens of thousands of local jurisdictions.
Internet Sales Taxes

  • Businesses with less than $1 million in annual online out-of-state sales would be exempt.
  • The onus would be on States to tell businesses what to collect, right down to the States’ smallest sales tax jurisdictions.
  • Each State must provide a single point of contact, administration, and remittance for businesses to deal with. Apportioning collections among local jurisdictions would be the State’s problem.
  • Free software must be provided to sellers from whom a State wants to collect “that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect rate changes.”
  • Sellers are immunized against liability for errors in State-provided software or rate data.
  • Any software provided by any State must be capable of handling sales and use tax transactions of all participating States. So a business would need only one software package.

Consequences, Intended and Otherwise

Anything that government does, even with the best intentions, has consequences. Some we can see coming, and others are not immediately obvious.

Buyers, of course, are generally dismayed by the potential end of their free ride. On the bright side, the taxes collected will be spent locally to benefit buyers and their neighbors. To the extent that local businesses become more competitive with online out-of-state sellers, local economies will improve.

Maybe. An old economic adage says "If you want more of something, subsidize it; if you want less, tax it." There's a legitimate concern that an Internet sales tax will have a negative impact on online purchasing. More money coming out of the pockets of consumers could have a ripple effect that will ultimately mean less purchases. And it could also drive customers to foreign online retailers, who are not subject to U.S. laws. Retailers in Canada and Mexico would not have to collect online sales taxes, and can easily ship goods to U.S. consumers.

Senator Ron Wyden (D-Ore.) believes there are some privacy concerns. The proposed law would require online sellers to provide the addresses of their customers to state authorities, so they can determine how to allocate tax revenues within the state. "Tax authorities would get troves of data about online purchases delivered into their state. Curious state bureaucrats might look up the purchasing habits of ex-spouses, famous names, and political figures." The bottom line is that your private online purchases could become very public, and very embarrassing.

And there are those who argue that this will impose undue burdens on both retailers and consumers, for very little benefit. Internet sales in the U. S. totaled about $226 billion in 2012, up about 16 percent from the previous year, according to the Commerce Department. By comparison, total U.S. retail sales in 2012 totaled over 4.3 trillion. So online sales represent only 5 percent of the total.

If the average sales tax is 8 percent, the online sales tax will raise about $18 billion. Spread that money out to 50 states, and then divvy it up to tens of thousands of counties and cities, and nobody gets very much. If the benefits are small, and potential downsides for businesses, consumers, and the Internet economy are significant, why bother? If you feel strongly about this issue, contact your legislators, or sign this online petition.

Whether S.734 becomes law remains to be seen. But the end of tax-free online shopping seems inevitable. Will it change your shopping habits? Your thoughts on this topic are welcome. Post your comment or question below...

 
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Most recent comments on "Internet Sales Tax Is Coming"

(See all 51 comments for this article.)

Posted by:

Steve Ellis
24 Apr 2013

I'm sure the MF's in Congress will exempt themselves from this added burden on taxpayers


Posted by:

Jonathan Baker
24 Apr 2013

@ Dennis W. Waterman "When I "retired" I started two websites plus selling on Amazon and eBay. So now the government wants me to become a tax collector."

Reread the article. Only those businesses that generate a million or more on out-of-state internet sales must collect state sales taxes.

I doubt that you fall into that category. However, if by chance you do, would you share your secret for success? 8^D


Posted by:

Gail
25 Apr 2013

I'll just start buying locally again as much as possible as will many others. Think about the business this will take away from our post office. This will very likely be the final blow to our already struggling postal service.

nose


Posted by:

Stan
25 Apr 2013

Right now, the condition is that businesses without a presence in your state don't have to collect taxes for your state. This bill is supposed to change that, because it's a matter of "fairness". Well, no, it's not. Anytime you see the word "Fairness" (as in Paycheck Fairness Act) in a bill from Congress, it's guaranteed *not* to be "fair". Local businesses want it because they think that people who would be their customers are instead buying someplace else. States want it because they can't make their own citizens pay "use" taxes on stuff purchased out of state.
If it passes, and that's a real question considering the makeup of the U.S. House of Representatives, I would guess that it will result in an immediate decline in the volume of business done online, as I think someone mentioned, not because people will turn to buying locally, but because people will limit their buying. So those states that charge sales taxes might see a slight increase in tax revenues, but only a slight one. They will get more tax from internet businesses than they had before (which except for California and maybe Texas is zip), but less from local businesses, since they will be affected by the general fall-off in sales.


Posted by:

SamIamHis
25 Apr 2013

I live in Wisconsin we have what is called Use Tax. As a business owner and a resident of Wisconsin I am required to file with the state any purchases I make that have not been taxed. My tax preparer says most individuals don't pay this tax even when though is included on their tax form as something they must report. For the business it is another business form that gets filed at year end along with many other tax forms. I just do it. I pay Caesar what is Caesar's. I keep books - even personal ones and it isn't difficult to do.

Though I am not crazy about paying taxes, until we vote people in who prioritize the streamlining of the entire tax system, this is how it is: complex and cumbersome. Since most people in Wisconsin ignore this line on their tax form, Wisconsin would benefit greatly by this legislation which would put the onus on the seller to collect the appropriate tax from the purchaser as a true cost of the sale and then pay it to the proper state.

By the way Bob, your article was excellent and clearly defined the nature of what is happening with this bill and you did it without apparent bias.


Posted by:

Old Man
25 Apr 2013

Re: Jorge, 24 Apr 2013

Taxes are based on: Point of delivery, Point of order, or Point of sale. (Section 4(7))

So, technically it could impact non-US purchasers. Most companies already collecting sales tax or VAT use Point of delivery. The law would allow these to be collected based on the purchaser's location (Point of sale) for non physical purchases (music, movies, software, et al.). If neither Point of delivery nor Point of order can be identified, then Point of sale is to be used.

So, whether or not the law affects non-US customers really depends on how the company applies it.


Posted by:

Beverly Chapin
25 Apr 2013

Just ordered a microwave by internet, free shipping because I can wait for slow delivery. Age and health make store shopping problematic. Aside from my own convenience and need to watch pennies, the cost of the internet tax collection boggles the mind - how many more government employees will this need? So how much will it either cost the taxpayer or dilute the amount left to be distributed? I don't see any real benefits to this!


Posted by:

John
25 Apr 2013

Bob:

Does this mean that Vladi Putin will also have the right to collect sales tax from residents of the U.S.? Seems like the logical next step.

Later, John.


Posted by:

Old Man
25 Apr 2013

This law will have minimal effect on my online purchases. What I buy online is either not available locally, or can be delivered to a local store (convience).

Actually, I am in favor of total sales tax - no income taxes. That is the only fair way for everyone to do his/her share - no loop-holes, unreported income, money laundrying, or other ways to avoid taxes. A fixed rate on all sales, split between Federal and States, would benefit government tremendously. Billions could be saved by doing away with the IRS. Billions more could be collected on illegal money. Money saved or invested would be tax exempt - until it was spent. Of course, certain items would be tax exempt, just as they are in most states charging sales taxes. The amount actually provided to each state would be based on that state's purchases. The order of priority in S.743, Section 4(7) is a fairly good guide.

Software would be simple: assess a given percentage (preferably 24%) and record the state using the provided criteria (no other personal information would be collected). The Federal government would take its share (16%) and pass the rest to the state (again, simple sorting software). States could use the same sorting software to distribute funds to the next lower level; and so on through all levels of taxing government.



Posted by:

Louie
25 Apr 2013

As already stated How will the state pay for all the additional cost of computers, cash distribution, software and manpower. As for wanting to know name & addresses all they should need is a zipcode unless they view your purchases for a year and then create a "Back tax bill w/penalties" for say 7 previous years. But typical goverment they see incoming dollars but not the outgoing dollars needed to manage the incoming dollars. How about a dumb idea have say Amazon give them the info for a year see how much they would have collected and see how much the locals would actually receive and do a realistic guess at the cost to admin the program. My guess is if they actually take the cost of the program from the proceeds they may not get as much as they think they will make and if they are short well increase the tax that citizens pay.


Posted by:

Sue
25 Apr 2013

Such a tax will not affect my online purchasing. I live in a fairly rural area and I shop on line for convenience. Before the Internet got so pervasive, I shopped by mail order. Those companies DID collect sales tax for the most part. So, no big deal regarding how it affects me. The cost of administering such a system is another matter. How do the mail order folks do it?


Posted by:

snert
25 Apr 2013

My take on part of this load of used food - the states will take the tax monies to pay the costs of collecting these ding-a-ling taxes but the ammount collected won't be enough to cover costs. My goodness golly gee whizz! Somebody is thinking with what they sit on and I don't mean a chair. What will they think of next?


Posted by:

camerams
25 Apr 2013

I live in MA. We have no sales tax on clothing or food items. I buy a lot of items online from brick and mortar stores with an online component - lack of items in the stores makes that a necessity. And, because most stores have a physical presence in my state, I pay sales tax on the non-excluded items. On the other hand, I can return them to a store for free. I don't mind paying sales tax across the board; that's not why I buy online. On the other hand, it's a huge burden for small online retailers who already have to pay a percentage to credit card companies and the like. Now they will have to spend their time and resources to collect and distribute taxes to multiple states. That may not be a problem for Amazon, but how about those who just happen to sell more than the maximum allowable - just because sales are more than $1,000,000 doesn't mean that profit is that high!


Posted by:

Mark Jacobs
25 Apr 2013

An easier solution. Get rid of the sales tax completely and raise the tax rates of a graduated state income tax. Sales taxes are disproportionate as they tax the very poor at the same rate as the very rich. Since states have a mechanism for collecting income tax already it will reduce the cost of collection.


Posted by:

rodney richards
25 Apr 2013

It's about time, overdue in fact, for an internet sales tax. but as usual, congress and the states are going about it all wrong.
There should be one flat tax, say 6 or 7 percent, collected from all buyers. Based on the state of delivery, that state gets a large percentage of the tax, say 5%. The Feds get 1 or 2 percent and administer the nationwide program and divvy up and report on the funds collected into the Fed treasury.
no different than Fed income tax, or corp tax.
Stop this multi-tax craziness!


Posted by:

rodney richards
25 Apr 2013

re; internet taxes on business sales, $ 1 million is too small a size to impose to collect the tax. It should be tiered say 0 up to $1 mil, 3% up to 5 mil, etc., with a full 6 or 7% over 412 mil, just like the small business categories we have here in Jersey, as an example.
all businesses are not created equal of the same. like everything else, it should be a progressive tax.


Posted by:

Lucy
25 Apr 2013

@ Jorge wrote:

"I don't clearly undestand how this bill can affect us, who live at the rest of the world (outside the US).
Must we be concerned or not??"


I occasionally buy from eBay UK and Amazon UK, and, even though I reside in the USA, if the seller collects the UK "VAT" (Value Added Tax, Sales Tax by another name) then I have to pay it. It is not shown as a separate line item, but is in the product price shown.

So I would imagine that it is quite possible that US sales tax might be collected from overseas customers also. Although that does beg the question which county would receive the tax collected.


Posted by:

Ed
25 Apr 2013

I think the sales tax (if any) should be a set amount (5%) for all sales regardless of the purchaser's state. Let the state decide how to divide the money between its cities and counties. Making the seller determine the sales tax in each state, county, and city would be an extremely difficult and costly process.


Posted by:

Steve
26 Apr 2013

WOW - cannot believe other websites don't mention the shortcomings and the futility of this new bill!! I did a post on this with a trackback 4U...


Posted by:

Gary
27 Apr 2013

Approving ANY tax increase is insanity!! There are already too many suffocating taxes and fees. There is no such thing as a "progressive" tax - that's an oxymoron. One problem as I see it, is the tendency of local retailers not stocking the products that are easily available online probably because of inventory tax issues. I can only hope this ugly idea is put to rest, soon.


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