U.S. Senate Moves Toward Allowing Internet Sales Tax

The Marketplace Fairness Act would allow states to collect sales tax on e-commerce. What does it mean for your business?
November 14, 2011

Ten U.S. senators have introduced a bill to allow states to collect sales tax from out-of-state retailers. Some small businesses (those with annual revenues of less than $500,000) would be exempt.

The Marketplace Fairness Act would bypass a nearly 20-year-old prohibition on states collecting sales tax on catalog sales, and by extension, on e-commerce. In 1992’s Quill Corp v. North Dakota, the U.S. Supreme Court ruled that states cannot tax businesses that don’t have a physical presence within their boundaries. Such taxes would regulate interstate commerce, which only the federal government can do.

In recent years, several states have moved to get around the court ruling. Among them: New York, Rhode Island, North Carolina, Illinois, Arkansas, Connecticut and—most famously—California. Per California law, any website based in the state that had a marketing affiliate relationship with a retailer out-of-state would be considered to give the retailer a bricks-and-mortar presence in the state, and therefore subject to the sales tax. This led to a much publicized fight with Amazon, and the online giant’s termination of its deal with California affiliates.

California recently delayed implementing its law for a year, saying it was giving Congress the chance to enact a national law. (Amazon said it would support any federal legislation.)

Under the proposed law, states could collect Internet sales tax if they make their tax systems compatible with that of other states. This is no small undertaking: There is a huge disparity in what states tax. The Camarillo, Calif.-based Performance Marketing Association, points out that in some states, Snickers are taxable as candy but Kit Kat bars aren’t because they contain wheat. (Since 1999, 44 states have signed on to what is known as the Streamlined Sales and Use Tax Agreement, voluntarily agreeing to make their tax systems compatible, but the agreement is nonbinding. Meaning: It’s still up to Congress to approve legislation authorizing states to collect sales tax from companies outside their borders.)

Companies with revenues of less than $500,000 would be exempt. That's not total revenue; it's "remote sales" revenue, such as that acquired via the Internet.

Amazon and brick-and-mortar retailers support the bill. Said Amazon vice president Paul Misener: “It’s a win-win resolution.”

The National Retail Federation also praised the move. Matthew Shay, president of the National Retail Federation, said, “In a 21st Century retail industry, we ought to have a 21st Century system to ensure uniform collection of sales tax.”

Others were less supportive. Said the Direct Marketing Association in a statement:  “This bill, even in the best of economic times, is bad policy as it interferes with the free flow of commerce among the states” and would hamper e-commerce.

EBay also opposes the bill. Tod Cohen, the company’s vice president for government relations, said in a statement: “This is another Internet sales tax bill that fails to protect small-business retailers using the Internet and will unbalance the playing field between giant retailers and small business competitors. It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity.”

Get more on business taxes.