Online Sales Tax: Good for Small Business?

An increasing number of state governors and brick-and-mortar retailers are pushing for a national Internet sales tax. States claim that they are missing out on billions of dollars in tax revenue, while offline retailers say that current state tax laws favor their online competitors.

Current online sales tax laws can be difficult for business owners and their customers to understand. The general rule of thumb is that if your customers are based in a state where your business has a physical location, the customers must pay a sales tax on items they purchase online. Some states like New York and California have recently passed laws that require all Internet retailers to start collecting sales taxes, regardless of physical presence.

To avoid the confusion caused by disparate taxation policies, as well as to level the playing field, Congress has attempted to pass several measures that would add a standardized sales tax for online purchases. In 2012, Congress introduced the Marketplace Fairness Act, a bill aimed at boosting revenue by allowing states to collect sales taxes on online purchases. The act was supported by a long list of companies and associations, including state governors and local mayors who claimed they were missing out on upwards of $20 billion through lost state tax revenue.

Others who supported the Marketplace Fairness Act and have backed similar legislation include labor groups, booksellers associations, the National Retail Federation, food stores, communications and electronics groups, book, newspaper and periodical publishing groups, real estate agents, and other groups, associations and businesses.

Those opposed to the online sales taxes include online computer services, conservative research groups like the Heritage Foundation, e-commerce advocates and companies like Overstock and Ebay, which do most of their business online. Critics say taxing online purchases is unfair because the state provides very little services and infrastructure to e-commerce companies; by contrast, brick-and-mortar companies rely heavily on state and local infrastructure and services.

But supporters of an online tax argue that every business uses airports and highways, whether they have a physical presence in the state or not, so it is unfair that only local businesses pay employee and property taxes. Jeff Milchen, co-director of the American Independent Business Alliance, notes that “Internet sellers could not do business without the infrastructure to ship their products.”

So far all measures to establish a sales tax for online purchases have failed; however, bipartisan support seems to be growing for this type of legislation and Senator Lamar Alexander (R-Tenn) announced plans last week to introduce a modified version of the Marketplace Fairness Act to the new Congress.

Source:

Klein, Karen. “It’s Retailer vs. Retailer in Internet Sales Tax Push.” Bloomberg Businessweek. Jan. 10, 2013.

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