Topic of the day: Internet sales tax

Published: Tuesday, May 7 2013 2:45 p.m. MDT

Under the proposed law, companies like eBay would be subject to sales taxes on sales out-of-state. (Associated Press) Under the proposed law, companies like eBay would be subject to sales taxes on sales out-of-state. (Associated Press)

On Monday the U.S. Senate — by a vote of 69-27— passed a bill that would require out-of-state retailers to collect sales taxes when they sell products over the Internet, catalogs and through radio and television ads.

The bill, called “Marketplace Fairness Act,” would apply to online sellers that have sales of at least $1 million outside of states where they have physical operations — such as a store or a warehouse. Though it faces and uphill battle in the House, the fact that the legislature was bringing up expanding what could be taxed on the Internet has created a lot of debate.

Leading the charge for those who are for the bill, the USA Today editors argue that an Internet sales tax is long overdue, “The exception for certain Internet purchases might seem like a good deal for consumers. But taxing brick-and-mortar stores, while exempting many of their e-commerce competitors, has a number of negative effects.” They argue that stores that hire locally and are involved in the community are unfairly punished as they pay higher taxes than their online counter-parts that are subsidized with taxpayer funds.

The American Prospect points out that “States are collectively facing a $55 billion budget shortfall this year. An Internet sales tax could help ease the budget gap, generating an estimated $23 billion in additional revenue.” The current laws prohibiting states from collecting sales tax on purchases from out-of-state retailers makes it harder for cash strapped state governments to raise money.

The Olympian summarizes most arguments for the bill by toting the fairness it provides to the market place. “If Congress is serious about supporting small businesses and creating jobs on Main Street, they should pass the Marketplace Fairness Act without hesitation.” Mom and pop stores are unable to compete with the sales tax free prices of online retailers, and states are stopped from collecting revenue from purchases within their states.

At the same time as many argue that the bill would level the playing field for small time business owners, others, such as EBay in this counterpart to the USA Today editorial, argue that the law would simply complicate and hurt small business that sell their products online. “The Internet sales tax bill threatens small businesses by treating them the same as multibillion dollar retailers that have stores and warehouses around the country.” For small business owners without the resources of multi-million dollar corporations, “Complying with 9,600 tax jurisdictions nationwide, and more menacingly, being audited and threatened with litigation by tax authorities around the country, is daunting.”

Scott Shane of Entrepreneur fears that the passing of the law, which only applies to the 45 states and the District of Columbia that institute a sales tax, will create new problems and loopholes to exploit. “Consider this example. Under the new law, if you live in Massachusetts, you will still have to pay sales tax (6.25 percent) on the toaster you buy at a store in state, but if you drive to a store in neighboring New Hampshire, you won't. The only difference under the new law is that an online retailer that ships the toaster to you would have to charge you Massachusetts’s sales tax. But just as with the current law, bricks and mortar sellers in states with no sales tax would be able to undercut competitors' prices because they wouldn't have to charge the added tax.”

Writing for CNN, Daniel Mitchell says that not only should online out-of-state retailers be taxed, but that not being able to collect taxes on out-of-state purchases will restrain politicians from getting out of control with their tax rates. “If politicians in, say, Arizona are worried that consumers will go online or travel across the border to avoid the punitive sales tax, then they should reduce their sales tax rate. Politicians can choose to maintain uncompetitive tax systems, of course, but they also should be prepared to accept the consequences.”

Opinions on both sides have valid talking points, and it will be interesting to see how the House votes.

Freeman Stevenson is an Intern for the Deseret News.

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