Online retailers face online sales tax requirement — Small business tax exemption available

US Congress

US Congress

It’s been a month since California and five other states began the requirement that online retailers collect sales tax from customers who reside in their states. This differs from current online sales tax laws in 45 states that require retailers to collect sales tax only if they have a presence such as a store or headquarters located in that state. New legislation making its way through Congress would impose sales tax requirements on all online sales. The proposed legislation includes a tax exemption that could benefit small businesses.

Filling state coffers

With states looking for more ways to close budget shortfalls, it’s no surprise that they are beginning to put more attention on the untapped revenues from online sales tax collections. What is needed is consistency in how sales tax will be applied. Currently there are three bills in the Congressional pipeline that address the online sales tax question. Lou Carlozo described the bills and the future implications of passage in his October 8, 2012 article for Reuters titled, “What the end of tax-free online shopping means for small business.”

The three bills before Congress are:

  • Marketplace Fairness Act in the Senate
  • Marketplace Equity Act in the House
  • Main Street Fairness Act in both House and Senate

Although none of the bills would change states over to one universal state sales tax, they would create one tax rate for most items. According to Carlozo, “Taken as a whole, the bills before Congress would bring some sanity and order to a nationwide system of more than 9,600 state tax jurisdictions. [...] Meanwhile, much confusion remains surrounding how and when Internet businesses will universally charge state sales tax.”

Opposition forces

Needless to say not everyone is happy about the prospect of having to collect sales tax. Leading the opposition is Steve DelBianco, executive director of NetChoice, a coalition of trade associations, eCommerce businesses and online consumers. Who can blame online retailers for fearing the new regulations? They would be accountable to more than 9,600 tax jurisdictions in each of 46 states.

James Johnson explained the opposing views in his October 10, 2012 article for titled, “Internet Sales Tax Bill Poses Threat to E-Commerce World Order.” Despite pushback from online retailers, the tide is turning toward enforcing online sales tax collections.

“With U.S. online retail sales still growing at an impressive rate, the potential to collect significant sales tax revenues has turned state and local governments into the biggest promoters of Internet sales tax legislation,” Johnson said. He added that pending legislation also has wide support among brick-and-mortar retailers like Wal-Mart and Home Depot.

Level playing field

For small businesses, the sales tax requirement may result in a more level playing field. What retailer has not been dismayed to assist a customer only to see them take out their cell phone and place an order to an online store? Consumers who now have to pay sales tax for their online purchases may see that shopping locally makes more sense.

What about retailers whose level of online sales can’t support the added burden of tracking and collecting sales tax? Congress is looking at setting an exemption anywhere from a low of $500,000 to as much as $5 million before the collection requirement goes into effect.

Even so, small businesses that do any selling online would be wise to maintain good records just in case they fall within tax collection requirements. After all, exemption levels can be reset at any time. However, Congress has thought of that, too. In an effort to ease the burden of reporting, current legislation includes stipulations for the adoption of streamlined measures.

An August 3, 2012 article for the Spokesman-Review titled, “Online Sales Tax Would Equalize Competition,” described how such a measure has helped in achieving collections for one state.

According to the article, “Washington is already one of about 20 states involved in the Streamlined Sales Tax Project, which serves to simplify the process. This voluntary effort has netted the state an extra $32.56 million in the past four fiscal years, according to the state Department of Revenue.”

Pending legislation would also give businesses a tax rebate to help cover the cost of sales tax collection as well as provide free software to help with the task.

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