More on the internet sales tax

From the Wall Street Journal, an excellent Q&A on what the internet sales tax entails.

The Senate is considering legislation that would effectively end tax-free shopping on the Internet. Here’s a closer look at some of the many wrinkles in this complex debate.

Q. How did we get here? Why don’t I have to pay sales taxes now on many online purchases?

A. Under a 1992 Supreme Court ruling, out-of-state retailers generally don’t have to collect sales tax for your state unless they have some physical presence in the state, such as a store or warehouse. In practice, many online and catalog retailers do have a physical presence in a lot of states, so they already collect the sales tax. But the Supreme Court ruling has encouraged explosive growth in online sales by retailers that have few physical facilities around the country. That lets them avoid collecting and remitting the sales tax, giving them a price advantage over brick-and-mortar retailers. Some online retailers argue that they still have to charge shipping costs, so the advantage is reduced or eliminated.

Q. What are “use taxes” and am I supposed to pay them?

A. Use taxes are a complement to sales taxes; if you don’t pay sales tax on an item – for instance, by buying it from an out-of-state online retailer – you’re generally supposed to pay the use tax. In practice, few people do pay use tax on items that escape sales tax. And states don’t do much to collect them. As Sen. Dick Durbin(D., Ill.), one of the prime sponsors of the legislation, said on the Senate floor this week:

“In my state of Illinois, you’re supposed to pay it when you file your state income tax. There is a line [on the tax return], `How much do you owe for sales and use taxes for purchase, remote purchases, or Internet purchases?’…One out of 20 people in Illinois fill out that line. Here we have some 95% of the taxpayers in my state that put zero. You just know that it’s more than 5% of the people living in Illinois that are purchasing over the Internet, so this tax is not paid.”

Q. If my state has a sales tax and I buy from an online retailer in another state, what rate would I pay under the new legislation? And what happens if one of the states has NO sales tax? (Basically, how will retailers calculate the tax owed?)

A. Assuming the legislation becomes law, the rate you pay will be based on where the item is shipped. Generally, that’s where you live. If you buy something and ship it to yourself, and your state and local jurisdiction don’t charge sales tax, you won’t pay any. If you buy an item and ship it somewhere else, you pay the tax based on the state where the item is shipped.

Q. Why did Amazon start supporting the legislation?

A. The 1992 Supreme Court decision has created a legal environment where many big Internet retailers have avoided locating physical facilities – such as warehouses or computer servers – in high-population states that levy sales taxes, because it would trigger a tax-collection duty for that state. Instead, they tend to locate facilities in smaller states. For a long time, Amazon followed this pattern. But Amazon has started same-day delivery in 10 cities, and expanding the service would require many more physical facilities around the country. So if it’s going to have to collect sales taxes, it wants everyone else to do so, experts say. Amazon says it doesn’t comment on its future plans.

Q. Will smaller retailers/eBay sellers be at a disadvantage?

A. Many of them think so, even though the bill has a number of protections for them. It requires participating states to simplify their sales-tax systems, and also provide software and services to help businesses collect and remit the tax. It would exempt businesses with less than $1 million in annual remote sales from any tax-collection responsibility. But advisers say it still could cost affected small businesses a lot of money to integrate the new software with their billing systems. Small businesses also dread the prospect of state audits. They worry that the new tax responsibilities will create another cost advantage for big retailers that can afford to have big in-house accounting and legal shops.

Q. Is this legislation likely to pass, and why now?

A. It’s still unclear that the legislation is going to become law anytime soon. Many conservatives are adamantly opposed, viewing it as a potentially large expansion of state taxing authority and an undue burden on small businesses. That argument could have a bigger impact in the GOP-run House of Representatives, where the bill would go after passage by the Senate. Polls also suggest that many voters are opposed. That, too, could have a bigger impact in the House, where members must face voters every two years.

But opposition in Washington appears to be weakening. Some conservatives take the view that the current system creates an undeserved tax subsidy for online sellers. Republican governors also have taken up the cause of online sales tax, giving GOP lawmakers more political cover. The bill also draws support from many non-retail businesses who are worried about the continued impact of Internet sales on Main Streets around the country.

Q. What about these court precedents I have heard about?

A. They are still around, and it appears that even if some version of the Marketplace Fairness act passes, it would be challenged. The high court in 1992 said it would create too much of a burden to make businesses comply with complex tax rules for thousands of different jurisdictions. Opponents say the new protections in the pending legislation still don’t do enough to ease that burden.

Senators Coburn and Paul try to kill the bill:

 A handful of amendments drafted by GOP Sens. Tom Coburn of Oklahoma and Rand Paul of Kentucky to the online sales tax collection bill would have the effect of killing the entire legislation should it ever reach the House. While the underlying measure doesn’t actually affect federal income taxes, the amendments do change the tax code. Such measures must begin in the House to avoid running afoul of the Constitution’s origination clause. 

And watch Democratic (surprise!) Senator Ron Wyden slam the bill on the Senate floor: