How Controversial New Online Sales Tax Bill Could Change E-Commerce

One of the best things about shopping online--besides the fact that you can do it in your pajamas--is that you often don't have to pay sales tax. Well, that may be about to change, if legislators have their way.
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One of the best things about shopping online--besides the fact that you can do it in your pajamas--is that you often don't have to pay sales tax. Well, that may be about to change, if legislators have their way.
Photo: iStock

Photo: iStock

One of the best things about shopping online--besides the fact that you can do it in your pajamas--is that you often don't have to pay sales tax. Only that may be about to change, if legislators have their way.

Yesterday the Senate voted 74-20 to debate and amend proposed legislation, called the Marketplace Fairness Act that would require online retailers to charge its customers state and local sales tax, according to the New York Times. The Senate is expected to vote on it by the end of the week, and many in the business think the legislation will pass there. While Obama supports the bill, it will need to pass the House of Representatives after the Senate signs off before it goes to the President for his signature.

So what exactly is at stake here? Well, right now, when you buy something online you only have to pay sales tax if you live in the same state in which the company is located. But if the bill passes, all internet retailers will be required to collect taxes for the state and local governments of the buyers. Experts predict it could bring in $22 to $24 billion in taxes for local governments--money that is badly needed for schools, public works, etc.

State legislators have argued that large online retailers have an unfair advantage over local brick-and-mortars because of the tax issue. Showrooming, in which shoppers will come in and try on merchandise and then order it online somewhere else, is increasingly common, resulting in loss of sales for small retailers.

If the bill becomes law, state and local governments will need to provide free software to calculate all the individual taxes (per the Times, this could be up to 9,000 different municipalities). Businesses that make less than $1 million in out-of-state sales per year would be exempt from collecting these taxes.

And obviously some big e-commerce sites are fighting it. eBay sent out "tens of millions" of emails to its online sellers asking them to fight the bill, according to the Wall Street Journal. The biggest point of contention is that the threshold for charging taxes is too low--eBay thinks a company shouldn't have to charge customers sales tax until it earns $10 million in out-of-state sales.

Amazon, on the other hand, supports the bill. NPR gives some interesting reasons they're for it, and why the bill could actually be good for large e-commerce sites. First of all, it's going to be a bookkeeping nightmare for smaller online outlets to keep track of all the different local tax requirements. For a big company like Amazon who can hire staff and buy software to deal with it, it's not an issue. Also, Amazon--who's already agreed to charge state sales tax--moved large warehouses into states where it previously wanted to avoid charging sales tax, thus allowing same-day delivery, which could also hurt Amazon's smaller competitors who don't offer that option.

Either way, it seems that the bill is going to pass, so start factoring more taxes into your online shopping budget.