A controversial Internet sales tax moving through Congress will mostly benefit big corporations and state governments while hurting thousands of small businesses and consumers.
The Marketplace Fairness Act would essentially end tax-free Internet shopping by forcing online retailers with revenue of $1 million or more to collect sales taxes for the states in which their customers reside.
As it stands, online retailers do not have to collect sales taxes from out-of-state customers unless the retailers have a physical presence in that state, like a store or a warehouse.
Yesterday (Monday), the bill passed a procedural vote in the Senate by a 74-20 margin, which strongly hints at passage in the upper chamber in a vote expected later this week.
While there's more resistance to an Internet sales tax in the House, the bill is known to have bipartisan support there as well. President Barack Obama also has voiced support for the bill.
If it becomes law, the Marketplace Fairness Act will radically change the online shopping landscape.
"It really should be renamed the Internet Tax Collection Act because it is going to make online businesses the tax collectors for the nation," complained Sen.Kelly Ayotte, R-NH, one of the most vocal opponents of the bill.
Who Benefits from an Internet Sales Tax
The Internet sales tax will almost certainly become a reality because those that will benefit the most are almost all big and politically powerful entities.
In particular, state governments have been clamoring for an Internet sales tax for more than a decade. To be fair, the uncollected state and local sales taxes from online sales are by law still owed by consumers, but almost no one bothers to pay them.
Estimates of the never-collected tax revenue range from $11 billion to $23 billion annually – money that state governors and legislators coping with massive budget deficits would love to have back.
And as more Americans do more shopping online, the amount of lost sales taxes has continued to increase. Last year, online retailers had revenue of about $226 billion, a 16% increase from 2011.
The other major players lobbying in favor of the Internet sales tax are big-box stores like Wal-Mart Stores Inc. (NYSE: WMT), Target Corp. (NYSE: TGT), Best Buy Co. Inc. (NYSE: BBY), Home Depot (NYSE: HD) and OfficeMax (NYSE: OMX).
The big-box retailers have complained that the present system gives online merchants an unfair advantage in pricing and encourages "showrooming" – a practice in which customers check out a product at a large local store, then go home and order the product online to avoid sales taxes.
Somewhat surprisingly, the biggest online retailer, Amazon.com (Nasdaq: AMZN), is actually in favor of the Internet sales tax after having fought it for years.
Amazon's desire to offer same-day shipping meant that it needed more distribution centers in more states, which under the current law required the company to collect sales taxes in those states.
Having already surrendered that advantage in many key states, Amazon realized it was in its interest to support an Internet sales tax to force all of rivals, both big and small, to do the same.
Who Gets Hurt By an Internet Sales Tax
Which brings us to the most outspoken opponent of the Internet sales tax – eBay Inc. (Nasdaq: EBAY).
Many of the businesses that operate through eBay have between $1 million and $10 million in revenue, which means they'll have to collect sales taxes for as many as 9,600 different jurisdictions.
The company says the Internet sales tax will put a crushing administrative burden on small online retailers, and has asked that the threshold be raised to $10 million.
"EBay believes the bill would impose unfair tax burdens on small businesses, and does not include a reasonable protection for small businesses," Tod Cohen, eBay's general counsel, told The Wall Street Journal.
Although the bill in Congress now requires each state to provide software to assist in the collection of the sales taxes, small businesses still would need to manage the dozens of software packages.
That concerns some members of Congress.
"This legislation doesn't help businesses expand and grow and hire more employees," said Sen. Max Baucus, D-MT. "Instead, it forces small businesses to hire expensive lawyers and accountants to deal with the burdensome paperwork and added complexity of tax rules and filings across multiple states."
The broadest group to suffer from an Internet sales tax, however, will be the American consumer. The billions of dollars that the state governments so desperately want will come straight from the pockets of U.S. consumers, putting another dent in consumer spending.
That means the Internet sales tax will end up as yet another drag on the weak U.S. economy, although that doesn't seem to be a part of the congressional debate.
Given that the bill seems to have sufficient support from both sides of the aisle – a distinct rarity in recent years – it looks like consumers should start bracing themselves for another bite in the wallet.
"I don't think it's a matter of if, but a matter of when" the legislation passesCongress, Rachelle Bernstein, vice president and tax counsel for the National Retail Federation, told The Los Angeles Times.
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