The Ins and Outs of the Internet Sales Tax

Photograph by David Paul Morris/Bloomberg

Congress, retailers, and the tech community are buzzing about a so-called Internet tax that will pass the Senate any day now. The proposed law has made for strange allies (Amazon and conservative Republicans are both supporters) and confused consumers. Here’s a plain English explanation of the tax, the debate, and how it could all turn out.

No, the proposed Marketplace Fairness Act simply provides a practical way for states to collect sales tax for goods sold on the Internet. Right now, if you live in Ohio and buy something online from a New York merchant, you’re the one who is supposed to tell Ohio and pay the tax. But few people actually does this—so the law makes the out-of-state merchant responsible instead for collecting the tax.

The law would apply only to businesses that sell more than $1 million a year (so don’t worry about those bobbleheads you sold on eBay). It also requires states to provide free software to merchants to help them collect tax for more than 9,000 state, county, and local taxing authorities.

Quite popular, so far. The Senate voted 70-24 to pass an early version on Tuesday—a final version is expected to pass by the same margin this week.

State governments say they are losing billions on taxes they would have collected if people had gone to the store instead of shopping on the Internet. Same for county and city governments that argue that “show-rooming”—people going to stores just to look before buying online—is killing local communities.

Brick-and-mortar stores such as Wal-Mart say online retailers have an unfair advantage because they can charge lower prices since they don’t collect tax. Amazon, an online retailer, is surprisingly on Wal-Mart’s side (likely because Amazon already has to collect tax if it has a physical presence in a state—and its warehouses are in more and more states).

The White House is all in favor, too.

Senators from the few places that don’t have a sales tax (Oregon, Montana, Delaware, and New Hampshire) say the law will force businesses in their states to set up an expensive tax-collection system for the benefit of other states. Oregon’s Senator Ron Wyden, a Democrat, is leading the opposition.

Antitax crusaders, such as Grover Norquist and a few Tea Party Republicans, oppose on grounds that the law will lead to bigger government. The Wall Street Journal editorial board doesn’t like it, either.

EBay said the law will hurt millions of people who have home-based businesses and wants the exemption to be raised to $10 million a year. Tech lobbyists such as TechAmerica worry about the effect on e-commerce, although such giants as Google, Apple, and Facebook have stayed largely silent.

The financial industry is quietly opposing the bill, too, worried that Wall Street haters in other states will start taxing securities transactions.

The bill appears to be a sure thing in the Senate but faces a fight in the House. For now, the law’s supporters appear to have the upper hand, but this could change as opponents build a coalition to shift momentum.

Ultimately, it will be about which narrative prevails: that the bill is a common-sense measure to create a level retail playing field and allow states to collect the money they’re owed (as supporters say); or that it’s a burdensome new tax that will harm small businesses and e-commerce (as opponents say).

To read more, see the New York Times’s overview and this Bloomberg editorial.

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