By an overwhelming 75-24 vote, Senators, late Friday, approved an amendment to the budget draft that would authorize states to compel merchants to collect sales taxes on on-line purchases. The amendment itself is non-binding, but it signals broad support for legislation dubbed The Marketplace Fairness Act. Action on that legislation could come later this year.
Techincally, on-line purchases are subject to sales tax. A landmark Supreme Court decision, however, limits states ability to compel merchants to collect the tax, unless the merchant has a substantial “physical presence” in the state. Under current law, consumers are expected to report their on-line purchases to the state and remit the taxes they owe. Unsurprisingly, almost no one does this.
The Court made clear in its ruling that only Congress could authorize states to force merchants to collect any applicable sales tax. States are afraid that, as e-commerce continues to grow, they will face a significant erosion in their sales tax base. Brick and mortar merchants worry that, without the imposition of sales taxes, on-line products and services will have a price advantage over traditional purchases.
Supporters argue that the Marketplace Fairness Act simply levels the playing field between e-commerce and Main Street commerce. That isn’t exactly true, however.
Under the terms of the Act, traditional retailers would continue to collect applicable sales taxes in the jurisdictions where their store is located. On-line retailers, however, would have to collect sales taxes applicable to where their consumer is located. On-line retailers would have to keep track of the 7,000+ sales tax jurisdictions in the country and regularly remit sales taxes there.
A better solution would be to apply the traditional retail sales tax model to the on-line world, having the on-line merchant collect the sales tax applicable where it is physically located. If I drive from my home in Virginia to Maryland, an admittedly rare occurrence usually made under duress, and I purchase a product, I don’t tell the retailer, “Wait, I live in Virginia. You need to collect that sales tax and send it to Richmond.”
That is exactly the model that would apply to the on-line world under the Act. The situation will get even more complicated as mobile products, services and payments continue to grow. My mobile has a DC area code, so which jurisdiction gets to levy a tax on my purchase?
Again, the Senate vote is non-binding. The strong majority in support of on-line sales tax collection, however, suggests this debate will heat up very quickly. You’ve been warned.