Many small businesses have been calling on the U.S. government to require retailers to collect sales tax from online customers in all 50 states. It's an unfair competitive advantage, they say, that brick-and-mortar retailers must charge sales tax to every customer while online retailers do not.
The issue has heated up in Congress in recent years, but has yet to be resolved. So, what's the status of the online sales tax push? Will online retailers ever be required to collect it from all their customers? Or will the current rules stay in place?
Here's a Q&A on what you need to know about the online sales tax — and what's likely to happen in coming months:
Q: What are the Current Rules?
A: Retailers currently must collect sales tax in states where they have a physical presence — such as a store, warehouse, call center, or office. Small local retailers generally collect sales tax on all their sales while an online retailer without a physical presence in the same state may not. This is what many local retailers argue creates a competitive disadvantage. Large retailers like J.C. Penney or Macy’s typically collect tax on their sales, including online sales, because they have stores in many or all states.
Q: What's the Marketplace Fairness Act?
A: In May 2013, the Senate passed the Marketplace Fairness Act (MFA), legislation that would allow all U.S. states to require retailers to charge sales tax to online customers in all states and localities that have a sales tax. If enacted, states would be allowed to require all sellers to collect sales tax if the state has adopted certain simplification provisions. Retailers with less than $1 million in annual revenue would be exempt.
Critics of the bill argue that requiring online retailers to charge sales tax to customers across the nearly 10,000 U.S. sales-tax jurisdictions would be a huge administrative burden. Supporters refute that claim, saying the sales tax-collection process could be simplified by software that would allow a merchant to type in a customer’s address and easily pull up their local sales tax rate.
Large corporations have lined up on both sides of the issue. Wal-Mart, for example, supports the MFA and requiring online retailers to charge sales tax, while eBay has rallied against it.
Q: Why Hasn't the Marketplace Fairness Act Been Enacted?
A: Despite passing in the Senate, the MFA could never muster enough support in the Republican-led U.S. House. In fall 2013, House Judiciary Committee Chairman Bob Goodlatte laid out "seven principles" that he said would guide the House when drafting its own online sales tax legislation. However, the House has yet to introduce its own bill.
Several Republican members of Congress have been very vocal in their opposition to the idea of charging any sort of online sales tax. Sen.Ted Cruz (R-Texas) described the MFA as "the height of lunacy" in November 2014 and said he would not support charging online shoppers sales tax. "Don't mess with the Internet," he said, according to The Hill.
The MFA was attached to another bill in 2014 that would extend longstanding rules preventing the taxation of broadband Internet. But that joint legislation failed to pass due to disagreements in Congress.
Q: What's the Future of Online Sales Tax?
A: Democratic members of Congress have sought to get the MFA passed in the House, but it's been continually shot down. House Majority Speaker John Boehner blocked the passage of the MFA during Congress's lame-duck session in December 2014. Now that Republicans control both chambers of Congress, it seems unlikely that online sales tax will become a high priority anytime soon.
Still, supporters of enacting an online sales tax remain vocal. In late November 2014, the Alliance for Main Street Fairness — a group that supports the passage of MFA — hosted a national teleconference pressing Congress to pass an online sales tax bill.
Rex Solomon, owner of a jewelry store in Houston, told the conference attendees that he's seen customers in his store shopping online for the same jewelry he sells in order to avoid paying the local sales tax, according to The Hill. He said the MFA would help solve that problem by ensuring online retailers — at least those with more than $1 million in annual revenue — couldn't avoid charging sales tax.
Rep. Goodlatte said last year that he is working on his own online sales-tax legislation, but has not revealed details, according to Politico. It's likely that the MFA will again get attached to legislation that would ban the taxation of broadband Internet, but the fate of that legislation is still unclear.