Online Sales Tax: The Current State of Play

It’s all up to the House now. 

The Senate looks poised to pass the Marketplace Fairness Act, which would require certain online sellers collect sales tax. The White House has the pens out to sign it. Only the House of Representatives may stand in its way.

A House bill has garnered bipartisan support. But it’s still not clear whether it has the votes to pass the lower chamber, since many members in that Republican-controlled body have a built-in resistance to any expansion in taxes and taxing authority.

Still, ground has shifted on this issue quite a bit. Even Amazon has endorsed this bill, although it has generally opposed online taxes at the state level. As the world’s biggest e-tailer, Amazon has been singled out as a target for collection efforts. It is also increasingly opening up distribution centers in individual states, which could make it subject to local taxes. So, executives probably figure, let’s push for a federal solution, which every site will be subject to. On the other side are sites like eBay, which worries it will hurt its base of mostly small sellers.

Others oppose it on general principle, particularly conservatives who see it as a new tax and expansion of state taxing power. Now, the former is debatable—citizens are legally obligated to report online purchases and pay taxes on them. But most don’t; so it will feel like a new tax to people.

Yet, for the most part, arguments have shifted to specifics, a sign that, as e-commerce matures, the Internet’s days as a tax-free zone are numbered. The current bill calls for a “small seller exemption,” which lets companies that sell less than $1 million out-of-state off the hook; eBay wants to raise it to $10 million and also exempt companies with fewer than 50 employees. And many want the current “simplification” provisions—meant to prevent e-sellers from coping with a maze of local laws and levies—expanded and strengthened.

I have written before about the possible effect of an online sales tax on our industry. It will help jewelers trying to price-match the Internet. But it will also likely hurt companies like Blue Nile, as the company has admitted in its financial filings. (It’s hard to imagine a small seller exemption that would encompass Blue Nile.)

Lately, JCK has begun to hear from another constituency concerned about this bill: small jewelers that have launched online businesses, who fear that having to collect out-of-state sales taxes will add additional costs, hurt sales, and make them face legal issues if they don’t comply. To them, the bill’s definition of “small seller” holds a lot of weight.

But, as the quote says, at this point we are just haggling over price. By any measure, an Internet sales tax looks a lot more likely after this week’s events.

JCK News Director