Congress May Be Forced to Adopt Internet Sales Tax

Last year, the U.S. Senate passed the Marketplace Fairness Act of 2013, a bill that authorized state governments to collect sales and usage taxes from online retailers. Under current law, the only online merchants that are required to collect sales taxes are those that have a physical presence in that particular state. Internet Taxes

Brick and mortar retailers have long complained about this “loophole” in the law arguing that it gives Web retailers an unfair advantage. Led by Walmart and (surprisingly) Amazon, physical stores and their lobbying groups have pushed heavily for this bill to become law. On the other side, online retailers led by eBay have argued that the burden for a “mom and pop” retailer to collect and remit sales taxes for over 9600 state and local jurisdictions is far too cumbersome. Until now, the House of Representatives agreed with the latter argument.

Since its passage last year in the Senate, the Marketplace Fairness Act has been put on the back burner in the House. For the most part, the GOP-led House leadership has sided with online retailers and opposed this legislation. However, another legislative priority may force them to take it up.

In July, the House of Representatives overwhelmingly passed the Permanent Internet Tax Freedom Act. This bill would make permanent a long-standing ban on taxing Internet access, which is scheduled to expire in November. If no action were taken before its expiration, states would be allowed to impose taxes on Internet services such as broadband or DSL access.

The senators that support the Marketplace Fairness Act are threatening to attach it to the House’s Permanent Internet Tax Freedom Act, forcing an “all or nothing” choice between approving both measures or allowing the Internet access tax ban to expire. At this point, it is unclear how this will play out.

It is possible that the House will hold firm on not allowing Internet sales tax and allow the widely popular Internet access tax ban to expire; this would give them the opportunity to blame the Democrat-controlled Senate for the ban’s expiration just days before the November 4 mid-term elections. On the other hand, the congressional leadership may decide that renewing (and making permanent) the Internet access tax ban is too important and agree to attach the Marketplace Fairness Act to its passage.

As a consumer, it is important to be ready for either possibility. Be prepared for the idea that you may need to pay sales taxes on all your online purchases, regardless of who you order from. You should also prepare for the possibility of paying tax to your cable or phone company for your Internet access. If you are an online retailer, speak to your business accountant about the possible changes under the Marketplace Fairness Act and what you will need to do to stay in compliance with the thousands of state and local tax jurisdictions under this law.


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