Peeling Back the Online Sales Tax Layers

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It's far from a done deal, but the days of mostly tax-free shopping on the Internet moved one big step closer to ending on Monday.

By a vote of 69 to 27, the Senate passed the Marketplace Fairness Act with bi-partisan support. The bill would allow a state that has a sales tax to require online retailers—those with more than a million dollars in out-of-state sales each year—to collect that sales tax from all of its customers in that state.

Under current law, Internet retailers don't have to collect sales tax unless they have a physical presence in that state, such as a warehouse, office, showroom or brick-and-mortar store. The burden is on you, the shopper, to pay that sales tax if your state collects it—but few people do.

(Read More: Senate Approves Bill Allowing States to Tax Internet Purchases)

There's a lot of money at stake here. State treasuries lost around $11 billion in uncollected tax revenue from Internet sales last year, according to a study for the National Conference of State Legislatures, which supports the legislation.

"This bill and its companion in the House will level the playing field for all retailers—both online and off–while safeguarding states' rights," Matthew Shay, president and CEO of the National Retail Federation, said in a statement. "And the bill does it all without raising taxes, new government mandates or adding to the deficit."

The bill faces an uncertain future in the House, where conservative members have labeled it "a tax increase" that must be stopped.

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Grover Norquist, president of Americans for Tax Reform, has called the bill "a bad idea" and told CNN recently it will not "sail through the House" the way it did in the Senate.

Rep. Steve Womack, R-Ark., sponsor of the bill in the House, said "saving local retail businesses" depends on passing this measure. Wal-Mart, which is headquartered in Arkansas, supports an Internet tax.

How are small to medium-sized online retailers dealing with all this?

"Everyone is just kind of holding their breath right now, waiting to see what happens," said Ron Rule, CEO of Coracent, an eCommerce consulting firm in Tampa, Fla. He believes the biggest impact would be on companies that have a business model based on tax-free sales.

Here are answers to some commonly asked questions about the Marketplace Fairness Act:

How soon could this happen?

Online merchants and states would have time to prepare for the changeover. Even if the House does pass the bill, nothing would happen until the fall.

How much tax would I be charged?

If you live in the five states without a state sales tax—Alaska, Delaware, Montana, New Hampshire and Oregon—you wouldn't pay anything. Otherwise, the online merchant will add the state sales tax; just as they would if you shopped at a local store.

Will this hurt online sales?

It could slow sales a bit. After all, online commerce has greatly benefited from being a tax-free zone.

"Internet sales have been growing rapidly and it's going to continue to grow rapidly because there are many advantages to buying over the Internet: convenience, variety and so forth," said Alan Auerbach, a professor of economics at the University of California, Berkeley. "But there are some purchases that might be marginally discouraged if there's a tax."

Could this help sales at traditional stores?

Many believe it could, especially for purchases where the tax savings from shopping online are significant. It might be more convenient to pay the tax and walk out with the item, rather than wait for it to be shipped.

It might also cut down on "showrooming," a growing problem for stores. That's when someone goes to a physical store to check out the merchandise, but then buys it online.

What about the cost of collecting and paying the taxes?

"For some small retailers, it will clearly be a burden," said Neil Bruce, professor of economics at the University of Washington. "This will impose costs on some online retailers who've been selling online without collecting taxes."

Some states don't charge sales tax and those that do often tax different items. For instance, New York charges sales tax on some clothing; Pennsylvania does not. And the tax rate varies from location to location.

"If you owe a little bit to this state and a little bit to that state, this could be awkward and complicated," noted Eric K. Clemons, a professor at the Wharton School of Business.

Online merchants who have their site hosted by a bigger company should be OK, but those who run their own platforms and host their own shopping carts may have some technical challenges and added expenses to deal with.

Who supports the bill and who opposes it?

The National Retail Federation has been leading the charge on this one. Brick-and-mortar retailers believe online stores that don't collect sales tax have an unfair advantage., which had always argued against an online sales tax, now supports it. The shift in position comes as Amazon expands operations into more states, requiring the online retailer to collect the taxes from customers in those states.

Another online powerhouse, eBay has lobbied against the bill, which it believes will hurt some of its sellers. EBay wants Congress to exempt businesses that have less than $10 million in out-of-state sales or fewer than 50 employees.

—Written by's Herb Weisbaum. AP contributed to this story.

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