Online Sales Tax: Fair But Not Fun

December 4, 2012 — 5 Comments

Since the dawn of the internet users have enjoyed shopping, for the most part, tax-free. A 1992 Supreme Court Ruling said that states could not collect sales tax from businesses that do not have a physical presence in that state. As such, online retailers have enjoyed a competitive advantage over most local retailers, except in the 4 states (DE, NH, OR, MT) without a sales tax. For example, if a California resident wanted to buy a stereo that cost $100, they could head to their local electronics store and pick one up for a total charge of around $110, factoring in state and local sales taxes. Or, they could search the web for deals, likely find the stereo for a cheaper or discounted price, and purchase it without any sales tax added. Even if they did not find a better deal, they’d still save nearly 10% on their purchase by buying online. Shipping costs might makeup for this difference, but nowadays most online retailers offer free shippping deals for members or for orders over a certain amount. As such, consumers are switching to online shopping as their preferred method of retail purchasing, hurting local stores and state revenues. In California alone, the state loses nearly $1 billion each year from uncollected sales tax on internet purchases. Nationally, the trend has been spiraling upward for years. According to the US Census Bureau, over 76% of American households own a computer, and Americans enjoy nearly universal internet access. Given the above, it’s no wonder that e-commerce sales have nearly quadrupled in the last decade (see infographic below).

Online retailers are well aware of this tax loophole, and some developed their business models accordingly. For example, the largest online retailer Amazon, stationed its warehouse in Washington state, allowing them to sell their items tax free to 99% of Americans. Other major retailers though, such as Wal-Mart, cannot do the same since they have a physical presence in all 50 states. On Capital Hill, these two corporate giants have been pouring millions into lobbying efforts to fight or fend off an online sales tax bill.

That fight may soon be over. Years of complaints from small retailers, the surge of internet shopping and crippled state revenues from a weak economy have rejuvenated efforts for an online sales tax bill. Just a few days ago in the US Senate, the Market Place Fairness Act was brought up to be considered as an amendment to the National Defense Authorization Act – a large military spending bill. Although Senators voted to end debate and proceed to bring the bill to a vote without the attached amendment, the Market Place Fairness Act is far from dead. Championed by Senators Dick Durbin (D-Ill) Mike Enzi (R-WY), and Lamar Alexander (R-TN), the bill would require online sellers to collect tax from their customers and re-distribute the revenue to state governments. A spokeswoman for Sen. Durbin said that he “is working with his colleagues … to look for any opportunity to move the bill. He is keeping all of his options open, whether that be to work for a vote on the bill as a stand-alone or part of a larger piece of legislation.” The Market Place Fairness Act currently has 21 co-sponsors in the Senate.

While the bill waits for its next upbringing, local legislature’s are passing their own measures to collect revenue from online sales. In Indiana, similar legislation will be introduced before the end of the year. In an interview with the Associated Press, State Rep. Ed Delaney (D-Indiannapolis) said, “There’s no reason to give a tax preference to one part of the retail world and not to the rest. That’s what we’re doing right now.” He added that the state should already be collecting the 7 percent sales tax from these purchases, and that the new legislation would make sure of that.

He’s referring to the “use tax,” which most states have, but do not enforce. Technically, in states like Indiana, California, New York, Ohio, and 20 other states, residents are supposed to report their untaxed purchases, including those made online. However, enforcing this policy is difficult and expensive, and reporting rates of any use tax usually amount to less then 1% of all filers. A recent University of Tennessee study estimates that nearly $12 billion will be lost from potential state revenue in 2012 from failure to collect taxes on e-commerce trasactions. Total untaxed transactions amount to a whopping $23 billion, according to the Streamlined Sales Tax Governing Board.

Proponents of the Market Place Fairness Act cite the above figures in support of the bill. They say the current system is unfair; an online sales tax would even the playing field so that small businesses would not be faced with significant price disadvantages. Although for years Amazon has lobbied against this measure, they have recently changed their position due to their effort to increase shipping speeds, creating a need to open more warehouses in different states and thus being subject to more state taxes. This could be the lobbying push this bill needs to pass congress, however, a strong wall of opposition still remains. eBay – the consumer to consumer internet corporation – opposes the bill because its users, many of whom run their own small businesses through the site, would lose their price advantage. Director and Senior Director of Government relations for eBay, Inc., said that, “Any bill having to do with Internet sales taxes should protect all small businesses.” Other corporations without physical presence in many states and most of the online retail industry, such as Netchoice and, also oppose the measure.

While the outcome of the Market Place Fairness Act remains unclear, it seems increasingly likely that an online sales tax bill will soon become Federal law. So, enjoy shopping the internet tax free while you still can.


Source: Statista (

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Trackbacks and Pingbacks:

  1. Wall Street Joins the Fight Against the Internet Sales Tax « The Joy of Tax Law & Litigation - April 23, 2013

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  3. Hurry-up online shoppers, your sales tax looms! « The Joy of Tax Law & Litigation - March 27, 2013

    […] The amendment was drafted by Sen. Mike Enzi (R-Wy.) based on S. 336, the Marketplace Fairness Act, which Enzi introduced earlier this year. With this amendment, the Senate made clear its support of a national tax on a wide range of Internet purchases. A companion measure, H.R. 684, is pending in the House. (See Also: Online Sales Tax: Fair, but not fun) […]


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