Internet Retailers Will Likely Start Charging Sales Tax Across the Board Soon

The passage of the Marketplace Fairness Act will authorize 45 states (and the District of Columbia) to require large online retailers to collect state sales tax on purchases made by residents. (Some retailers, like Amazon, already charge sales tax on orders in which it has a warehouse or physical presence.) Once in place, the Marketplace Fairness Act would therefore mean most online consumers would have to pay sales tax on their online goods — a cost many have managed to avoid through e-commerce.

The Effect of Marketplace Fairness on Online Sales

Thanks to a 1992 Supreme Court ruling, not all online shoppers are charged local sales taxes by Internet and catalog retailers as long as said companies don't have a physical presence in a customer's state of residence. While this means plenty of shoppers have been dodging anywhere between 4% to 9% sales tax at point-of-purchase, 22 states already require residents to pay a "use tax" when filing their state taxes. So while this tariff tax isn't collected at checkout, many Americans are already supposed to pay a set rate for their out-of-state purchases; upon its implementation, the Marketplace Fairness Act will ensure that consumers pay the proper amount of tax owed to their respective states — to the tune of an estimated $12 billion per state.

But, more importantly, supporters of the Marketplace Fairness Act say that it will level the playing field of small brick-and-mortar stores and small online retailers (with sales under $1 million) with larger, online competitors. For retailers that do bring in more than $1 million each year, complicated tax collections from 9,600 tax jurisdictions across the U.S. will likely impact owners and may leave consumers debating whether to shop online altogether. Not surprisingly, in a letter to customers, eBay CEO and bill opponent John Donahue advocated to expand the sales tax exemption to include businesses with fewer than 50 employees and that make up to $10 million annually in out-of-state sales; these such measures, Donahue says, will help to avoid an unfair burden on smaller business owners.

There are even more exemptions to the Act. If you live a state where Amazon has a warehouse — like Arizona, California, Kansas, Kentucky, New York, North Dakota, Pennsylvania, Texas, or Washington — you are already paying taxes on purchases from the online giant and your at-checkout costs will remain the same. For residents of Montana or New Hampshire (and other states that don't charge any sales tax at all), online shopping bills will also not increase. But for a majority of the nation, a uniform online sales tax will undoubtedly increase the cost of your online shopping endeavors. To find out exactly how much more you will be paying for online purchases, use Tax Cloud's interactive map.

Don't panic-shop just yet. States presently not collecting sales tax for online purchases must provide residing companies with free software for calculating taxes. State governments must also set up a singular entity to collect payment, which itself requires that most states first simplify their tax policies. When all is said and done, the earliest this bill can go in to effect is October 1. What's more, keeping in mind that the House is more resistant to the bill, there's a possibility that Americans' online shopping won't be affected until 2014.

The Marketplace Fairness Act has been the subject of much debate for years. But now that it's in the spotlight, we want to know what you, dealnews reader, think of it. If the bill is approved, will the new online sales tax affect your online shopping habits? And remember, you can always avoid sales tax during your state's tax free weekends over the summer.