Online sellers may have to collect sales tax

Hadley Malcolm, USA TODAY | USATODAY

The days of avoiding state sales taxes online could be numbered as the Senate takes up debate on a bill that would let states require companies to collect sales taxes online.

A final vote expected by the end of the week.

The Marketplace Fairness Act has been gaining momentum for months. It would give states the authority to require online businesses to collect state sales tax. In March, the Senate showed support for the legislation in a non-binding 75-24 vote.

If it passes, the bill would overturn a 1992 Supreme Court decision that ruled that it was too difficult for remote sellers to have to comply with myriad state tax laws, only requiring businesses with a physical presence in a state (whether a storefront or warehouse) to collect state sales taxes.

The bill would also require states to simplify their sales tax laws to make it easier for businesses to comply.

"For the states, it helps them close a $24 billion leak in state budgets. For retailers, it allows them to compete on a level playing field," says David French, senior vice president of government relations for the National Retail Federation, which has been a strong supporter of the bill.

The issue pits small retailers against large retailers, online retailers against brick-and-mortar businesses. Proponents argue that the legislation will allow local businesses to compete with large out-of-state retailers who currently offer lower prices, since they don't have to collect tax.

But opponents say the burden on small businesses that sell online would hinder competition, and denounce the unfair pricing argument because online businesses often have to charge more for shipping.

Currently the bill exempts sellers with less than $1 million in out-of-state sales a year from collecting state sales tax. Ebay, one of the bill's largest opponents, says that is far too low and wants the limit raised to less than $10 million in remote sales, or businesses with fewer than 50 employees.

"We don't want to make it harder for small businesses to grow," says Brian Bieron, senior director of federal government relations at eBay.

He's also concerned with the administrative capability of small businesses to comply with out-of-state tax authorities.

"The real issue is tax enforcement," he says. "Now 49 other states could theoretically take you into court or audit you for tax compliance, and that's a really daunting change. (Small businesses) don't have an army of tax lawyers and accountants."

Ann Whitley Wood, who sells designer clothes on consignment through her eBay store Willow-Wear, is very concerned about what collecting state sales tax would mean for her essentially one-woman business. While she currently falls under the small seller exemption with about $800,000 in sales a year, she says she couldn't sustain her businesses' growth once she hits more than $1 million and potentially has to start collecting taxes.

"If I had to spend many more days administratively on sales tax collection, then I need to find a new gig," Wood says. "It's going to be a huge burden."

If anything, the $1 million threshold is too high, French says, countering that brick and mortar retailers collect sales tax "on the very first dollar of sales."

"Why should (online retailers) get special rules?" he says.

In any case, shoppers aren't likely to be hard-hit by online state sales taxes, French says, adding that a sales tax is usually low down on a list of considerations consumers make when buying.

"The consumer impact of this will be negligible," he says.

If the bill passes the Senate, it will head to the House Judiciary Committee before being considered on the House floor, says Max Behlke, a policy specialist and lobbyist for the National Conference of State Legislatures.

He says NCSL is hoping for a final vote and passage before this summer.

"It's not fair to anyone to have different price schemes," he says. "Whether it's brick-and-mortar or whether it's online, having everybody comply by the same law is a true definition of fairness."