Senate Approves Internet Sales Tax Bill

May 8, 2013

pic-tax-onlineOn Monday, May 6, the Senate approved legislation that would for the first time allow states to collect online sales tax revenue from out-of-state purchases. The Marketplace Fairness Act (S. 743) sponsored by Sen. Mike Enzi (R-Wyo.) would allow the 45 states (and the District of Columbia) that currently charge sales taxes to require large, online retailers to collect tax on purchases made by their residents. The law would only apply to online sellers that have sales of at least $1 million outside of states where they have physical operations, like a store or a warehouse.

The 69 to 27 vote is a major victory for some retail groups and state governments, who for years have fought to close what they see as a loophole that allows as much as $23 billion in annual taxes from online sales to go uncollected. The measure split Republicans senators, as 22 Republicans voted no in addition to five Democrats, while nineteen Republicans supported the measure.

Specifically, the bill empowers states to collect taxes on purchases made online by consumers in their states from out-of-state retailers. Under current law, states can only collect from companies that are physically located within their borders. Customers who order items online from another state are often supposed to declare the purchases on their tax forms, but few do or are even aware of that requirement.

The bill would exempt small businesses that earn less than $1 million annually from out-of-state sales, and requires states to provide retailers with software to calculate sales taxes based on a buyer’s zip code. States would be allowed to collect taxes on out-of state purchases in six months, to give retailers time to prepare.

Supporters said the overwhelming vote in the Senate will give the bill momentum as it heads to the House. They hope to get a bill to President Obama’s desk by the end of 2013. However, Republican leaders in the House are unlikely to maneuver around the Judiciary Committee, which has jurisdiction over the legislation, and instead will proceed through normal committee channels. Although, the House version—sponsored by Rep. Steve Womack (R-Ark.)—has more than 60 cosponsors, House Judiciary Committee Chairman Bob Goodlatte (R-Va.) has concerns with the bill being too complex and forcing businesses to comply with too many different tax rates and systems.