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02/24/2014

Internet Sales Face New Tax Debate

Retailers report online sales were up 8% for the week of Valentine’s Day compared to 2013. More than a third of the internet-based purchases were made through mobile devices tallying up a total of nearly $14 Billion in online consumer spending for the romance-based holiday.  Upcoming debates will reveal how state and local authorities would ‘love’ to tax online revenue flow to compensate for declining income and real estate tax revenues.

Internet-Sales-TaxIn the next few weeks, heated debate is expected on the proposed Marketplace Fairness Act which gives states the authority to collect sales taxes and use taxes from remote online retailers. The legislation attempts to simplify state sales tax rules to make collections easier and more uniform.

Americans are using the internet to buy and sell products and services at an explosive rate.  Surveys show the top reasons they buy online include the ability to select from a wide variety of items, discounted pricing, free shipping and, in many cases, no sales tax.  Officials are targeting large Internet retailers who currently escape state and local sales taxes.  

Right now, retailers with no physical presence in a state (such as a store, office, warehouse or sales representative) are not required to collect sales tax for an internet-based sale to a consumer in that state.  Proposed legislation targets remote sales made by retailers with annual gross receipts exceeding $1 million.

Brick-and-mortar businesses pay property and income taxes that the online or remote-selling counterparts may not pay.  Their business associations support requiring sales tax collections for all online sales and other taxes on profits made by online retailers.  Amazon.com and Overstock.com are just a few of the large retailers that have been lobbying against the tax increases, saying, if they must pay a tax on their bottom line income, they will have to pass it on to consumers.  

The issue of collecting Internet taxes is complex. Retailers and taxing authorities disagree about who is responsible for collecting taxes.  Should states themselves collect both sales taxes on purchases and income taxes on retailers with headquarters or warehouses in their jurisdiction?  Are Internet service providers responsible for collecting taxes? Is the Internet itself to be considered a product or a service; and then what kind of taxes apply?

States and municipalities are lobbying with renewed intensity for the chance to collect Internet sales and use taxes arguing they are losing billions of dollars in badly needed revenues.  Opponents claim the benefits of the Internet contribute to economic growth and productivity that already boosts revenues.  They also say gearing up intermediary taxing authorities to collect and manage the new taxes would be too costly and ripe for corruption.

Meanwhile, since 1998, the Internet Tax Freedom Act has banned federal, state and local governments from imposing internet-only taxes such as taxing the bandwidth you use, the volume of data used (or bit use), and email usage.  It also prevents the imposition of multiple or layers of taxes on e-commerce.  It does not prevent the taxation of the sale of goods through the Internet.

When it was enacted, the legislation grandfathered existing taxes in ten states that were mostly access, franchise and telecommunications taxes, as the potential of the Internet sales base was not yet clearly understood.  The law has been extended three times, but is set to expire this October which could open another window for imposing new taxes.

In Kansas, an attempt last year to revise the out-of-state Internet sales tax law died in committee.  In Missouri, the physical-presence rule applies and has been a hotly debated matter.

For now, the national debate is gearing up again with lawmakers expected to call for a vote on the matter this Spring.

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