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Tuesday, August 26, 2014

Commercial impact of online sales tax collection

Selling online probably did not feel like one big Delaware after the Marketplace Fairness Act is was became law. This law is a legislative effort to collect approximately $12 billion in annual sales tax revenue that would otherwise be an Internet retailing subsidy. On April 6, 2013, the U.S. Senate approved preliminary passage of the Act with a vote of 69 to 27. Of the 69 yes votes, 21 were from Republicans. If passed, the law will require online businesses with retail revenues over $1 million to collect sales tax from customers.

Internet sales tax
In-state e-sales require businesses to collect tax


Internet retailers have benefited from a lack of sales tax collection ever since the World Wide Web became a marketplace for goods and services. The Marketplace Fairness Act would negatively impact online businesses in a number of ways. 

First, according to USA Today, the cost of collecting taxes from multiple jurisdictions will be a financial expense for businesses without a tax collection process already in place. Brick-and-mortar companies are already required to collect sales tax, and thus will not be impacted in this way.


A second way businesses are affected by the Internet sales tax law is through revenue. When customers feel the extra pinch when purchasing online, they are likely to think twice before buying. This would mean that online retailers would face potentially lower annual revenue numbers in addition to having higher expenses. Moreover, survey results reported by CNN Money show that nearly 30 percent of online shoppers would increase their shopping at brick-and-mortar stores if the online tax legislation becomes law.


An Americans for Tax Reform publication raises additional potential problems associated with the Marketplace Fairness Act. The letter to the bill's sponsor, Senator Mike Enzi of Wyoming, questions how businesses will be protected from out-of-state legislative acts, unreasonable audits and tax liens if the law goes in to effect. Moreover, when online retailers sell to out-of-state clients where the business has no physical presence, those companies would not necessarily be adequately represented regarding tax penalties imposed by those states.


Although the Marketplace Fairness Act is believed by its supporters to facilitate even tax collection across all businesses, businesses that have operated for years without collecting sales tax will face an entrepreneurial hurdle that challenges their competitiveness, should the bill become law. This is made evident in a speech by Sen. Ted Cruz, R-Texas, which raises the concern of online retailers having to deal with another economic headwind and a new obstacle to commercial dynamism as consequences of the bill. 

Even though an Internet sales tax influences consumer behavior and affects business administrative practices, there are some business protections built into the law. For example, businesses with annual revenue under $1 million would not be subject to the tax collection requirements, and if they are, they would be given free tax software to help with the transition. However, according to House Judiciary Chairman Robert Goodlatte, the bill is still underdeveloped, because there is “no uniformity on tax rates and definitions.”

Image license: Geralt/Pixabay; US-PD