The death of America’s accidental internet tax evasion

Each little box is a tiny tax fraud.
Each little box is a tiny tax fraud.
Image: AP Photo/Scott Sady
We may earn a commission from links on this page.

There comes a time when every new market finally loses its race with the tax collectors, and the internet is almost out of breath.

A 75-24 vote in the US Senate has set the stage for the passage of the Marketplace Fairness Act, which would require American companies to collect state sales tax—generally 5% to 10%—incurred when their US customers purchase goods and services online. Previously, online businesses only collected sales tax in their own state or where they had some other physical presence.

The decision would raise state revenues by billions and give a boost to brick-and-mortar businesses, but it has divided internet companies, with many in opposition but a few, including retail giant Amazon, in favor. President Obama announced his support for the measure today.

Localities in the US often tax a percentage of citizens’ consumption through a levy on sales, and technically, that includes purchases made online. However, logistical and legal impediments made it difficult to force businesses in other states to collect the taxes incurred by their citizens. This abetted a rash of largely involuntary tax evasion around the country by people unaware that they are supposed to track their purchases and calculate their own taxes. That gave internet retailers an advantage over local stores, and as more customers shopped online, depleted state coffers.

The Marketplace Fairness Act would ask states to simplify and harmonize tax rules in order to requires businesses—though only those with greater than $1 million in remote sales—to collect and pay up.

Exactly how much this will bring in is hard to say. Estimates range from $11 to $32 billion, although initial collections in states that have begun taxing some online retailers haven’t matched up with forecasts. Still, it can be a significant amount of money: $96.4 million for California, about one percent of the state’s annual budget.

Most online businesses aren’t happy with the cost of dealing with so many different tax jurisdictions. eBay, fearing that its individual sellers might be dissuaded by the tax, has made its opposition known and asked for a bigger small business exemption. Amazon, in a major turnaround, supports the bill, since its logistics network has taxable facilities in so many states already. Some critics of the bill fear a slippery slope, saying that the bill opens up the possibility of applying other local laws to the global internet, while others worry about privacy protection.

While the bill is set to pass the Senate (and with a Republican sponsor, Senator Mike Enzi of Wyoming, no less) passage in the House is less certain. Opposition from conservatives who see the bill as a tax increase could lead the Republican leadership to balk. But ideology might not outweigh the complaints of local business owners and local government. Republican Steve Womack and 54 other co-sponsors are pushing for passage.

If they succeed, it will be a major blow to the laisse faire internet economy. But it also serves as recognition that the internet economy is here to stay.