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Online Sales Grow, but Federal Action to Address Sales Tax Issue is Stalled

Holiday shoppers are increasingly turning to the internet to make their purchases, but Congress has yet to close a loophole that gives on-line only retailers an advantage over their bricks and mortar counterparts.

Currently, online retailers that do not have a physical presence in a particular state are not required to charge sales tax to residents of that state. That doesn’t mean that these purchases are tax free, though: purchasers are still legally required to pay the sales tax, by declaring it on their income tax form. Few do.

When online-only retailers do not charge consumers sales tax – even though sales tax is owed on the purchases – those retailers have a competitive advantage over other retailers that are required to collect sales tax.

Ideally, Congress would step in to level the playing field between different types of retailers, by passing legislation that would allow states to require all retailers to collect sales tax. But so far, action on this issue has stalled. The U.S. Senate passed the Marketplace Fairness act last year, but U.S. House of Representatives Speaker John Boehner has announced that the bill won’t be taken up before the session ends at the end of the year. The bill is not expected to be revived next year.

In the absence of federal action, states have worked to level the playing field for different types of retailers. Some states have modified the definition of what it means to have a physical presence in the state, compelling more retailers to collect sales tax. Other states have negotiated deals with major online retailers, particularly, to collect sales tax. Amazon now collects sales tax in 23 states.

The bottom line is that national tax policy continues to give an advantage to online retailers over other retailers that have storefronts or warehouses in a particular state. States have made progress in addressing the issue, but are limited in what they can do. Meanwhile, the value of purchases made online continues to grow, with the online sales on Cyber Monday (the Monday after Thanksgiving) increasing 8.5% over last year.


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