The U.S. Senate has approved an Internet sales tax proposal, moving the legislation one step closer to enactment and paving the way for shoppers to pay sales tax on the majority of online purchases. The so-called Marketplace Fairness Act, sponsored by U.S. Sen. Dick Durbin (D-Ill.), would allow the 45 states (and the District of Columbia) that currently charge sales taxes to require large online retailers to collect tax on purchases made by their residents.
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The law would apply only to online sellers that have sales of at least $1 million outside of states where they have physical operations, like a store or a warehouse. The Senate voted 69-27 on Monday night to approve the bill, which enjoyed bipartisan support. But before it can become law, it must be approved by the House, where Republicans are split on the issue.
Some House Republicans have already expressed support for the bill, arguing that it would level the playing field for small brick-and-mortar retailers. They say it would not create a new tax, but rather enforce the collection of taxes already charged at traditional retailers. But other House Republicans still view that as a tax increase on consumers or say it would overburden Internet businesses in their states.
The Obama administration has endorsed the bill, so if it can gain approval in the House, it is likely to become law.
If the bill is enacted, academic studies estimate more than $12 billion in additional sales taxes will be collected from online purchases each year.
Big brick-and-mortar retailers with an online presence, such as Wal-Mart, already charge sales tax for web purchases. But in many states, you can shop at Internet-only retailers like Amazon or Overstock without automatic tax collection. Compliance with sales tax in those cases is on the honor system.
That’s because under current law, online sellers are required to collect tax only in states where they have a physical presence. And while most states require shoppers to pay a so-called “use tax” when a sales tax wasn’t collected at online checkout, few people actually follow through.
“This collection disparity has tilted the competitive landscape against local stores, creating a crisis for brick-and-mortar retailers around the country and in your state,” David French, senior vice president of the National Retail Federation, one of the bill’s loudest supporters, said in a letter to Senate members.