Internet Sales Tax One Step Closer to Reality

A tax on online sales, long sought by bricks-and-mortar retailers, moved one step closer to reality Monday when the Senate voted 69-24 in favor of the Marketplace Fairness Act.

The bill seeks to fix what many see as a tax loophole: Under current U.S. law, an online retailer is only obligated to collect a state's sales tax from shoppers if it has a physical presence in that state. While a few states have circumvented that requirement with "affiliate nexus" laws that primarily target Amazon.com (AMZN), the vast majority of states still don't collect tax on online sales by out-of-state sellers.

The bill before Congress wouldn't impose a national sales tax, but it would empower states to tax those out-of-state online sellers if they so choose. It has the support of numerous retailers, as well as the National Retail Federation, the industry's main lobbying group.

While previous versions of the bill have died on Capitol Hill in recent years, today's vote didn't come as a great surprise: More than a month ago the Senate took a symbolic vote on the measure, and passed it 75-24. And while the bill is opposed by a few key conservatives, it also has the surprising support of e-commerce's heaviest hitter, Amazon. Amazon's support of the bill can be traced to the company's push to establish a wider physical presence to facilitate faster delivery -- and the fact that it can handle the burden of taxation better than smaller online retailers.

The loudest voice of opposition in the business community has belonged to eBay (EBAY). Starting Sunday, the company began sending emails to more than 40 million users informing them of the bill and asking them to write their congressmen. In its current form, the bill only exempts online sellers with less than $1 million in out-of-state sales; eBay wants that threshold raised so that it only applies to businesses that do more than $10 million in sales and have more than 50 employees.

"This legislation treats you and big multi-billion dollar online retailers - such as Amazon - exactly the same," wrote eBay CEO John Donahoe in the letter.

The Marketplace Fairness Coalition, which is comprised of retailers supporting the bill, countered with its own letter noting that the vast majority of eBay's sellers would be exempted from collecting sales tax.

The impact on consumers, meanwhile, would be varied, with many Americans seeing little to no impact on their shopping experience. Five states -- Alaska, New Hampshire, Delaware, Montana and Oregon -- don't charge a sales tax at all, so residents of those states would be unaffected by the law. Several other states, including New York and Illinois, have already passed affiliate nexus laws, which means residents of those state are already paying sales tax for purchases from major online retailers like Amazon. And a few others, like South Carolina and Nevada, have already struck deals with Amazon to start collecting sales tax at a later date.

That leaves the states that charge sales tax but haven't passed affiliate nexus laws. Successful passage of the bill would give these states the option of collecting sales on online purchases. In states that choose to exercise this new right, online shoppers will find themselves paying an addition 5%-10% on their purchases, depending on the state's tax rate.

That passage now depends on the Republican-controlled House, where it's expected to have a tougher time than it did in the Senate. The Wall Street Journal notes that House speaker John Boehner has been largely silent on the issue and Paul Ryan has expressed ambivalence; meanwhile, Rand Paul has editorialized against the bill, calling it an "internet tax mandate."

The question, then is whether the momentum from today's bipartisan vote is enough to overcome conservative opposition in the House. If it does, the days of tax-free online shopping will soon be at an end.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.


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