As Online Sales Increase, So Does Battle Over Internet Taxes


The fight over collecting online sales tax is especially heated this holiday season, as Internet retail sales hit new records—and taxes go uncollected.

A 1992 Supreme Court ruling stated that no out-of-state business could be required to collect sales tax in a state where it does not have a physical presence. There are multiple lawsuits as states fight for the right to collect. Online retailers, like eBay , Amazon and Overstock , stand on the other side.

In July, the New York Supreme Court dismissed Amazon's claim that it was unconstitutionally required to pay sales tax even though the company doesn't have a physical presence in the state. According to research by the Center for Business and Economics at the University of Tennessee, New York could have collected $654.9 million in online sales tax revenue. The state currently has a $1 billion budget shortfall. Amazon filed an appeal earlier this month. December.

Separately, Texas filed a claim in October against Amazon, saying the firm owes $269 million in uncollected online sales tax, along with interest and penalties, from December 2005 to December 2009. Amazon did not return CNBC's calls or emails for comment.

Jerry Cerasale, the senior vice president for government affairs at the Direct Marketing Association, said that requiring companies without a physical presence in a state to pay sales tax is simply unfair. "It is a tax-collection issue. Their employees and their companies, if they are not located in the state, receive none of the benefits of that state. It's unfair to have them to figure out 7,900 taxing jurisdictions and to collect those taxes."

How much is at stake? Estimates vary. According to University of Tennessee Center for Business and Economic Research, states will lose out on collecting upwards of $10 billion (nationwide) this year in online sales tax, at a time when 46 states are facing big budget gaps.

Massachussets Rep. Bill Delahunt, a Democrat who authored the Main Street Fairness Act, said that in some cases the lost revenue can comprise up to half of a state's budget deficit.

Year-End Investing Tax Tips  -  A CNBC Special Report
Year-End Investing Tax Tips  -  A CNBC Special Report

Delahunt told CNBC, "Uncollected sales tax will cause layoffs and [have a] huge impact on main street businesses, specifically small businesses. The Main Street Fairness Act allows states to collect the taxes they are ultimately owed, and [it] truly examines the difference between e-commerce and the brick and mortar business."

However, critics maintain that collecting online sales tax is extremely complex because of dealing with interstate commerce and say also that, without a physical presence in the state, online retailers are simply unrewarded tax collectors.

As the debate and lawsuits rolls onward, so does online consumer spending. According to the online market research company, consumers spent more than $1 billion on Cyber Monday, marking it the biggest one-day online shopping day ever. This past Monday, December 13, was the second heaviest online spending day on record. So far this holiday season, shoppers have bought more more than $21 billion online.

Maureen Riehl, vice president for government and industry relations at the National Retail Federation, told CNBC that "this is the bellwether for the health of the retail industry going into the new year. We think that with double-digit growth in online, we really need to get this fixed. Either everybody should collect or nobody should collect, so this is really about whether there is a sustainable sales tax system in our states."

This fight is far from over. Those involved in the Main Street Fairness Bill told CNBC an updated version of the bill will be reintroduced in the new 112th Congress and will likely be augmented to appeal more broadly to Republican leaders and fiscal conservatives.