Congress Again Considers Federal Internet Sales Tax

Lawmakers are yet again discussing federal legislation to require Internet retailers to collect sales tax on sales and pay those funds to the state where the purchaser lives.

Based on a ruling made by the Supreme Court in 1992, retailers have to collect sales tax on sales only when they have a physical presence in the state where they make the sale.  Since a company focused on Internet sales can sell to customers in any state even if they do not have a physical presence there, those companies generally choose not to collect sales tax.

Individuals are supposed to remit any unpaid sales tax on their state and federal income tax returns.  However, the IRS and state tax collection agencies have to date chosen not to enforce that rule.

Lack of Consistent Internet Sales Tax Gives Internet Retailers an Advantage

Retailers that rely primarily on physical stores have lobbied Congress for years to change the current law, as they are at a total price disadvantage when having to compete against Internet retailers that do not charge sales tax.

“This is a very important thing to level the playing field for all the retailers,” noted Luke Kenley, an Indiana Republican and the chair of the state Senate Appropriations Committee.

In May 2013, the Senate passed a measure known as the Marketplace Fairness Act that would require Internet retailers with annual revenue above $1 million to collect sales tax.  However, the Act has remained in the House Judiciary Committee as Congressmen continue to discuss if it takes the right approach to requiring Internet sales tax across all states.

One concern of Bob Goodlatte, a Virginia Republican and the chair of the House Judiciary Committee, with the Marketplace Fairness Act is that small Internet retailers would still be exempt from sales tax collection, which means this group would continue to have an advantage over brick-and-mortar retailers.  The exemption for small businesses exists in the current Act because of concerns implementing the correct sales tax for all jurisdictions would be cost prohibitive.

Goodlatte is proposing a version of the Act that removes the exemption for small Internet retailers.  From Goodlatte’s perspective, the final measure “should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.”

Since cities and states can determine their own sales tax rates, maintaining accurate data to calculate the correct sales tax for every location in the country has historically presented a challenge to Internet retailers.

Senator Deb Peters of South Dakota agreed that the time is right for Congress to pass a sales tax measure, as technology can now allow a given retailers to more easily calculate the correct sales based on a buyer’s address.

“Congress needs to authorize the ability for states’ rights,” note Peters.  “If Congressman Goodlatte has a bill, whatever you want to call it, that authorizes states to do what states can or will do, that’s all we need.”

“Without the permissive aspect of what we’re seeking here on a states’ rights issue, 50 states and U.S. jurisdictions are being held hostage,” note Alabama Republican state Representative Greg  Wren.  “If the definition federalism has evolved to a point where federalism now means there can be a usurpation of states’ rights, then we all need to go back to school.”

Congress is expected to continue discussions on the measure in the coming weeks.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.