The Days of Tax-Free Internet Shopping May Soon Be Over

On Monday, the House introduced a new bill that would require online retailers to collect taxes from buyers in remote states.
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Lauren Indvik
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On Monday, the House introduced a new bill that would require online retailers to collect taxes from buyers in remote states.
A new remote sales tax bill promises to level the playing field between brick-and-mortar stores and e-commerce companies like Amazon. Photo: David Ryder/Getty Images

A new remote sales tax bill promises to level the playing field between brick-and-mortar stores and e-commerce companies like Amazon. Photo: David Ryder/Getty Images

Tax-free online shopping may soon be a thing of the past. On Monday, Rep. Jason Chaffetz of Utah and Rep. Steve Womack of Arkansas introduced the Remote Transaction Parity Act, a bill that would require online retailers to collect sales and use taxes from buyers in remote states, even if those retailers don't have a physical presence there. 

Sound familiar? It is. Since sales tax was first adopted in the 1930s, states, retailers and lawmakers have disputed whether out-of-state businesses — from mail-order catalog businesses to e-commerce players — should be exempt from state sales and use taxes. The issue came before the Supreme Court in 1992, when the State of North Dakota filed a lawsuit against Quill Corporation, an office supplies company then based in Delaware, claiming it was required to collect use tax for North Dakota for licensing software to residents there. The court ruled in Quill's favor, stating that only companies with a "significant physical presence" or "nexus" in a state would be required to collect sales and use taxes there.

It's that ruling that has allowed e-commerce sites to go for so long without collecting state sales tax, except from shoppers located in their own states. But as e-commerce business has grown, eating away marketshare from brick-and-mortar retailers who do pay sales tax, and threatening the 45 states (and the District of Columbia) that depend on sales tax for revenue, lawmakers and lobbyists have sought to introduce new legislation that would enable states to collect sales and use taxes from online retailers, even those without a physical presence in their states. (Companies like Amazon have been particular targets, exploiting what some call a "loophole" in the ruling by contracting local affiliates, thereby allowing them to have a physical presence in a state without having to collect sales tax there. Many states have passed new laws so that they can now collect sales tax from those retailers. Today, Amazon collects sales tax in 25 states, for example.)

In 2013, it seemed that Internet sales tax was about to become a reality. A very similar bill to the Remote Transaction Parity Act, called the Marketplace Fairness Act, was introduced to both the House and the Senate on Feb. 14, 2013. The bill passed in the House on May 6, but stalled in the last session of Congress. (Womack, who helped introduce the new bill on Monday, was a prominent supporter of the Marketplace Fairness Act.)

The new bill should give the movement new momentum, and both the National Retail Federation and the International Council of Shopping Centers have come out in support of it. Critics of the bill say compliance will be unfairly costly and complicated, requiring retailers based in one state to collect sales tax for 45 states, all of which have their own complex tax codes and timelines. Businesses with annual revenues of less than $10 million will be exempt from the law for the first year; business with annual revenues of less than $5 million will be exempt for two years; and $1 million businesses will be exempt for three. Notably, mail-order catalog businesses without an Internet presence will not be required to collect remote sales tax.

While the bill, if passed, will no doubt impose costs and complications on online retailers, it's not likely to stem the industry's growth in a significant way.