Momentum is building to reverse a long-standing loophole in the tax code which protects online retailers from having to collect sales tax in states where they don’t have a physical presence.
The bill, dubbed the Marketplace Fairness Act of 2013, has already overcome a small hurdle in the Senate. Monday evening, the Senate overwhelmingly passed a cloture vote, a procedural vote allowing the bill to move forward, with a vote of 74 to 20. Later this week, the Senate is expected to have a vote on whether to pass or kill the bill. Also this week, the Obama administration released an official endorsement of the act in a statement from the Office of Management and Budget.
The debate swirling around the issue is heated. Proponents for the legislation argue that it would level the playing field for those brick-and-mortar businesses that can’t compete with e-tailers that don’t have to charge their customers sales tax. Also, proponents say that requiring online sellers to collect sales tax will bolster state treasury coffers, which are desperately in need of replenishing.
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Meanwhile, the most vocal opponents of the legislation, led by eBay Inc.’s chief executive John Donahoe, say that having to comply with state tax collectors from scores of different states is an administrative burden that will break the back of small-business owners.
Precedent for the current tax loophole was established in 1992, in a Supreme Court case . In the case, it was determined that the Delaware-based company, which had offices and warehouses in Illinois, California and Georgia, would not have to pay sales taxes for goods sold by mail-order to North Dakota. Since 1992, however, the Internet has radically changed the amount of merchandise being sold across state lines. According to a study conducted by The University of Tennessee, state and local governments were estimated to have lost $11.4 billion in 2012 on untaxed e-commerce sales.
While the legislation is largely expected to pass the Senate, its fate in the Republican-controlled House of Representatives is less certain. If the Marketplace Fairness Act were to become law, here's how it could play out for different types of businesses:
1. Online retailers with more than $1 million in gross annual revenue: Larger online merchants would have to start collecting state sales tax from consumers even in those states where the e-tailer does not have a physical presence. The law, as written by the Senate, would permit states to collect the tax, but does not require that they do so. These larger merchants would be required to begin collecting state sales tax on the first day of the first quarter that is more than 90 days after the law is enacted.
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Ebay argues that this would be too tedious a task for online merchants. “The current Internet sales tax bill would impose unfair taxes and burdens on small businesses that use the Internet, treating them the same as large national retailers who have the resources and capabilities to collect sales taxes nationwide,” says Tod Cohen, General Counsel and Vice President of government relations of eBay, in a statement emailed to Entrepreneur.com.
2. Online retailers with less than $1 million in gross annual revenue: Your business will not be affected. The legislation, as proposed by the Senate, includes a “small-seller exception” which would protect retailers making less than $1 million in sales each year from altering their procedures.
Ebay is advocating for larger businesses to be protected. Online businesses with fewer than 50 employees or less than $10 million in annual out-of-state sales should be exempt, according to Cohen.
3. Brick-and-mortar businesses: Some say the law would benefit those traditional Main Street businesses that have been losing sales to consumers who come into a store to inspect an item and then order it either online or from their mobile device to save on taxes. The Obama administration says the law would “eliminate the unfair advantage currently enjoyed by big out-of-state online companies over local neighborhood-based small businesses,” according to a statement from the OMB.
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