Will Internet Sales Tax Become Law?


Here’s a routine the online shopper knows well. Skim a book, try on a watch or compare refrigerators at a local store.

Then head home with the specs in hand and find the item on the Internet—cheaper, and often with no state sales tax. Of course, you buy it for less—at times, a lot less.

Dueling pieces of legislation, both of which were introduced in Congress in July, address the issue of whether to close the loophole that allows online shoppers in most states to avoid paying sales tax.

As it stands now, you only pay sales tax for Internet purchases if the retailer has a physical presence, or "nexus," in the state where you live.

The first legislation introduced July 1 was the Main Street Fairness Act by Rep. William Delahunt, (D-Mass.), which attempts to put e-commerce retailers on equal footing with brick-and-mortar businesses by imposing a state sales tax on consumers who shop online.

As a counter to Delahunt's bill, is a resolution, introduced Thursday by a bipartisan delegation led by Rep. Paul W. Hodes, (D-N.H.), which would maintain the status quo. It contains language that says “Congress should not impose any new burdensome or unfair tax collecting requirements on small online businesses, which would ultimately hurt the economy and consumers.”

" " -(D-Mass.), Rep. William Delahunt

Delahunt claims his bill would accomplish several goals: Bring in much-needed tax revenue for cash-poor state and local governments, avert other types of tax increases, such as on property, and level the playing field between Main Street and Web retailers.

State governments say they lose billions of dollars annually in tax revenue, due to online sales.

“If we can accomplish that [passing the bill], I suspect the states will not have to raise new taxes,” Delahunt told CNBC.

“If you are concerned about rising taxes, this is a vehicle to avoid that. No one wants to pay more taxes. I certainly don’t.”

However, the US Supreme Court upheld in its 1992 ruling on Quill Corp v. North Dakota the argument that it’s too onerous and costly for businesses to calculate how much tax should be collected because of the complexity of tax rules from state to state.

Within Delahunt’s bill is a provision that permits states to require sales tax payment as long as the states have accepted a set of rules that claim to simplify collection through the Streamlined Sales and Use Tax Agreement.

To date, 23 states have signed on to the agreement and others are considering it, according to the Streamlined Sales Tax Governing Board, which oversees the agreement.

However, the Massachusetts Congressman appears to be swimming upstream. His bill may well go the way of similar legislation that has failed. And the fact that it's an election year and that the nation has 15 million unemployed people makes the bill's passage especially unlikely.

Consumers love the no-sales-tax loophole when they shop online and they devise new ways to take advantage of it. For instance, some New York City residents have their Web purchases shipped to nearby New Jersey, where no sales tax is charged, to avoid shelling out the extra money.

In addition, such major e-retailers as eBayare squarely opposing the move, as are tax and Internet retailers groups.

Most such groups oppose the bill due to the maze of tax rates for thousands of tax districts throughout the country.

Woman shopping for clothes
Yuri Arcurs | Photographer's Choice RF | Getty Images
Woman shopping for clothes

“Our view is that it is still too burdensome for small and medium Internet stores to calculate state-local sales taxes to ‘over 8,000 jurisdictions'," William Ahern, director of policy and communications at the Tax Foundation, told CNBC.

The Tax Foundation is a nonpartisan group, founded in 1937, dedicated to educating the public about government tax policy.

“Brick-and-mortar stores say that's not fair because they have to collect," added Ahern. "But they only have to know one rate—the rate where the store is. They don't have to ask where the customer lives.”

Delahunt has countered that argument with a provision in the bill with exemptions for small businesses.

According to the Streamlined Sales Tax Governing Board, states have partnered with private sector suppliers of sales tax software and their programs are “quick and easy to use” and will help pay for the software of some retailers.

Jerry Cerasale, executive director of the Direct Marketing Association, a trade group with more than 300,000 members that include online retailers, called the Delahunt bill anything but “streamlined.” He said it would force businesses to hire tax departments to handle calculations for the various rates and any audits initiated by the tax jurisdictions.

However, the final word will come from you the taxpayer, constitutent and consumer: If you can buy that pair of shoes or Italian briefcase or mini-laptop cheaper online and avoid sales tax, it’s a perk you certainly want to hold on to.