Is Online Sales Tax Inevitable?

by QuickBooks

2 min read

The days of selling items tax-free online appear to be coming to an end.

The U.S. Senate has approved an amendment to the 2014 federal budget that would require online sellers who ship more than $1 million worth of merchandise each year to collect appropriate sales tax on internet purchases. The amendment passed with the bipartisan support of 75 senators.

Although the amendment isn’t binding legislation, it suggests that there is enough legislative support to pass a similar bill, such as the pending Marketplace Fairness Act of 2013. That law would require the collection of taxes on all online purchases through a simplified tax-rate system.

Right now, online retailers are required to charge sales tax only to customers who live in a state in which their business has a physical presence. “Physical presence” can be defined differently from place to place, but it generally means that wherever an online retailer maintains a storefront, office space, warehouse, or distribution center, it is obligated to collect any local sales taxes on purchases shipped to buyers statewide

Bricks-and-mortar retailers, who are required to charge sales tax on every purchase, support legislation that would level the playing field. Cash-starved state governments are also very interested in the payouts that would come from online retailers collecting taxes.

Mack McGee, vice president of sales and marketing for Groove Commerce, a Baltimore firm that builds and manages e-commerce websites, says the push for legislation is happening because e-commerce has grown so rapidly.

“Everyone is trying to catch up to this giant industry that grew in the background, and now they are trying to regulate it,” McGee says.

The Amazon Factor

Some retailers see Amazon’s freedom from collecting sales tax as an unfair advantage when customers are comparison shopping.

Amazon supports the Marketplace Fairness Act and already collects sales taxes on purchases made in Arizona, California, Kansas, Kentucky, New York, North Dakota, Pennsylvania, Texas, and Washington. In the next few years, Indiana, Nevada, South Carolina, Tennessee, and Virginia will join the list. In some states, Amazon has agreed to collect sales tax as part of an agreement to build fulfillment centers there.

In most states, customers are supposed to report their catalog and online purchases on their tax returns and remit the appropriate sales tax. But collection of those taxes is rarely enforced. That’s why so many retailers believe online sales taxes are inevitable sooner rather than later.

“What might be bad for e-tailers might be right for consumers,” McGee says, considering how strapped most states are for cash. “And that is something we can’t hide from as this industry evolves.”

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