Senate Approves Internet Sales Tax

June 10, 2013

Aside from the incredible convenience and generally competitive prices, one of the best things about shopping at Amazon and other internet retailers has been the lack of sales tax assessed on your purchases.

Of course, just because the retailer or website doesn’t collect a sales tax doesn’t mean that there is not one due. In fact, you’re supposed to report your internet purchases and pony up any sales tax due to your state when you file your annual income taxes.

But this means of collecting tax revenue has been heavily abused for years, as taxpayers simply “forget” to claim any internet purchases. States are left knowing that they are missing out on sales tax revenue, but unable to do anything about it.

a woman shopping onlineHowever, with governments at all levels now suffering from severe cash shortages, any and all means of collecting currently-legislated revenue are being pursued. It’s far better to collect what you are already owed, rather than to go through the process of requiring higher taxes from your citizens.

It’s for this reason that the states have long lobbied the federal government to enact legislation requiring internet retailers to collect sales taxes from their customers. And the federal government responded in early May, when the Senate passed the Marketplace Fairness Act of 2013. (The bill was previously introduced in both 2011 and 2013, but was never enacted.)

What does it say?

The bill proposes that the 45 states (and Washington, D.C.) which currently charge its residents a sales tax “large”, will be able to require large online retailers to collect sales tax on purchases made by their residents.

“Large” retailers are defined in the bill as those which have over $1 million in sales in states outside of which they have a physical presence. This distinction is designed to spare small online retailers from having to engage in potentially costly software and labor expenses in order to comply with the law.

Which Retailers are Affected?

Many large online retailers, like Best Buy and Walmart, already must comply with the sales-tax collection process, because they have brick-and-mortar operations in many states., which has few brick-and-mortar buildings other than warehouses and distribution centers, is the retailer that is the main target of this legislation. In recent years, however, many states have taken matters into their own hands and passed laws to force Amazon to collect sales tax from its residents.

Residents in Arizona, California, Kansas, Kentucky, New York, North Dakota, Pennsylvania, Texas, Washington and New York must already pay sales tax on their Amazon purchases.

State Sales Tax Rates

Some states tax clothing but not food. Some states charge for junk food but not for groceries. In New York, clothing and footwear under $100 is tax-free, but more expensive items are taxable.

Sales tax rates differ for every state. Fortunately, if you live in Montana or New Hampshire, you don’t pay any sales tax at all, on any product.

If you’re unfamiliar with the sales tax code in your state, the Federation of Tax Administrators has kindly put together a map with links to all 50 states and their sales tax regulations.

What about Digital Goods?

State sales tax rates on digital goods are as different as their rates on tangible products.

Washington charges a sales tax on all digital goods. Florida charges a tax on streaming video, but not on ebooks.

With digital products on the table, retailers like iTunes and Netflix are also on the targeted list of this new sales tax legislation. iTunes already collects sales tax on purchases by its customers (Check your latest purchase if you are not certain.) and Netflix says that the company complies with all current legislation.


It doesn’t seem like there should be much opposition to such legislation, but there is actually a great deal among small businesses. The crucial factor is the bill’s definition of which retailers are large enough to be required to collect taxes.

According to the bill, any business which does over $1 million in sales is considered large enough to comply. Small businesses argue that this will place an unduly heavy burden on them, in terms of labor and time required to comply, and that the definition of a small business is unreasonable compared to what is generally accepted.

The Small Business Administration defines a small business as one that does less than $30 million in annual revenue, and the IRS uses $20 million as its cut-off. Thus, the $1 million cited in this bill is greatly misaligned with reality.

What’s next?

House Bill H.684 is now in the hands of the House of Representatives, where it has been in subcommittee since April 8th.

So what does this mean for you?

If you don’t shop online much, probably nothing. Or if you tend to shop at small niche online retailers, again, you probably will see little impact.

But if you’re a frequent customer at Amazon or Overstock or other such online-only retailers, get ready to pay sales taxes soon.