Unlike brick and mortar businesses, online retailers have the unfair advantage of selling items on the Internet without collecting sales taxes while the “Main Street” businesses are obligated to collect and remit them. This imbalance hits locally owned businesses particularly hard and, as a result, adversely impacts local economies. Small businesses lose out on revenue and state governments lose out on the money needed to pay for necessary services, such as infrastructure funding.
A 1992 Supreme Court decision stated that mail-order catalog businesses only had to collect sales taxes in states where they had a physical presence—like a store or warehouse, referred to as “nexus.” This ruling is currently being applied to online sales transactions as well. The Court ruling noted that Congress has the authority to set the rules for how states can collect taxes from remote sellers.
Unfortunately, to date, Congress has failed to extend sales tax collection to online retailers, resulting in a public policy with at least three negative impacts:
- It disadvantages local businesses. Exempting online retailers from having to collect sales tax gives these companies the sizable competitive advantage in retailing of a 4 to 9 percent price over local stores.
- It undermines state and local governments by reducing tax revenue for infrastructure development, schools, police, and other services. Currently, 45 states assess sales taxes, from which they receive about 25 percent of their total revenue each year. A 2009 University of Tennessee study estimated that uncollected sales taxes on e-commerce cost states $7.7 billion in 2008. States and localities are forfeiting $23 billion in lost tax revenues.
- It is important to note that while remote sellers are not required to collect sales taxes, the sales or “use” tax is still owed by the purchaser on their state tax returns. Although Individuals are obligated to pay the “use” tax, few people do, and the use tax is almost impossible to enforce, which effectively exempts these purchases.
However, all of this could change with the passing of the ‘Marketplace Fairness Act’.
In a display of bipartisan support, the Senate passed the Marketplace Fairness Act by a wide margin of 69 - 27 votes. ASBC generated 668 letters to Congressional offices over the duration of this campaign. The bill will now head to the House for consideration.
On Thursday, February 14, 2013, 53 members of Congress (35 House members and 18 senators) introduced a bill known as the ‘Marketplace Fairness Act’ to the floor. The bill, which is a combination and revision of the ‘Main Street Fairness Act’, the ‘Marketplace Equity Act’, and the ‘Marketplace Fairness Act’ of the previous Congress, combines these ideas to win over previous skeptics.
The bill will bring in billions of dollars to help states close budget deficits, and to give them the flexibility to make needed investments in infrastructure or other priorities. This can create jobs while leveling the playing field for small businesses, allowing them to grow and create or retain more jobs.