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A Step Torwards Closing the Internet Sales Tax Loophole

Senate Expected to Level Playing Field for Main Street Businesses

Legislation that would allow states to compel internet retailers to collect sales taxes is expected to pass the U.S. Senate in the next couple days. Passage of the Marketplace Fairness Act would be a first step towards leveling the playing field between internet retailers and bricks-and-mortar businesses.

Under current law, internet retailers are not required to charge customers sales tax unless the retailer has a physical presence in the state where the customer lives. Customers are still required to pay sales tax on on-line purchases, by declaring purchases on their income tax forms. Few customers do this, though. By not charging customers sales tax, online retailers can undercut bricks-and-mortar retailers on price.

Some states have undertaken their own efforts to compel internet retailers to collect the sales tax, with varying success. It seems clear that a federal approach to this challenge would ensure a more consistent approach among the states, but until now Congress has been slow to take action on this issue.

Opponents of the Marketplace Fairness Act point to the difficulty that small businesses will have complying with the thousands of different sales tax jurisdictions across the country. There are a number of provisions in the bill that address those concerns, including an exemption for businesses with less than $1 million in out of state revenue. (EBay has asked Congress to raise that exemption level to $10 million.)

It’s not clear how the bill will fare in the House of Representatives. Many House Republicans are fiercely anti-tax, which could lead them to oppose this bill. On the other hand, the bill does not actually levy any new taxes, but instead changes the collection method for the sales tax already due on online purchases. Approaching the issue from this direction may allow some anti-tax advocates to justify voting for the bill. President Obama has said he supports the bill.

Wisconsin loses upward of $150 million per year in state and local tax revenue from internet sales, according to a University of Tennessee study.

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