PhotoSome of us are old enough to remember when making an online purchase was something of a novelty. For example, was founded in 1994 to sell books on the Internet.

“Yeah, right,” many people thought.

Today is an international online retailer selling a lot more than just books. And it has plenty of company. According to the U.S. Census Bureau, online sales, or e-commerce, totaled $225.5 billion in 2012.

In many of those sales, the consumer was able to purchase the products without paying state sales tax.

From the beginning of the consumer-based Internet, companies selling online didn't bother collecting sales tax. The individual purchases were small and so were the totals. By the time the states began to sit up and take notice, the U.S. Supreme Court had taken a position.

Supreme Court ruling

In 1992 the high court held that requiring out-of-state retailers to collect sales tax for the jurisdiction of each and every customer would be an unreasonable burden. Besides, in 1992 Internet sales were minuscule.

Since then online retailers have operated without having to collect sales tax, perhaps a small competitive advantage but more likely a greater advantage administratively. Online retailers don't have to file monthly sales tax returns with 50 different states.

Today, it's not only states that think online retailers should collect sales tax but so do brick-and-mortar retailers, most of which are independently owned. They argue that if they have to collect sales tax, so should their online competitors. Not having to charge sales tax gives online retailers, the argument goes, a competitive price advantage.

Some online retailers add on a state sales tax if the company has some type of physical presence in the customer's state. States and brick-and-mortar retailers have pushed for something more.

Marketplace Fairness Act

PhotoThe result is a bipartisan move in Congress to require all online retailers to charge sales tax. It's called the Marketplace Fairness Act. Brick-and-mortar businesses – already smarting from “showrooming,” the consumer practice of looking at a product in a store then ordering it online – say it helps level the playing field.

Some Internet retailers are fine with that. has publicly endorsed the legislation. After a high-profile dispute with California over the sales tax collection issue Amazon agreed to start collecting sales tax from California customers last September.

When the U.S. Senate last week approved the Marketplace Fairness Act, as an amendment to its budget resolution, the National Retail Federation (NRF) claimed it as a major victory.

“This is a critically important issue for retailers – both large and small – across the country,” said Mathew Shay, CEO of the NRF. “Both brick-and-mortar stores and e-commerce leaders understand that the Marketplace Fairness Act is common-sense legislation dedicated to protecting states’ rights, strengthening our communities and preserving our free market system.”

$24 billion in lost revenue

According to NRF, 45 states are losing an estimated $24 billion every year because of unreported Internet purchases.

But the battle in Congress isn't over as the Marketplace Fairness Act faces some opposition. eBay, for example, is among the Internet retailers who oppose the sales tax collection mandate.

eBay's circumstances are different from Amazon's. While some people do, in fact sell items on eBay as part of a business, most are consumers who are trying to sell used, hand-made or collectible items online. eBay argues that requiring them to collect and file sales tax on their sales would be like requiring someone to collect sales tax on items sold at a yard sale.

The popular arts and craft marketplace site Etsy could also be similarly affected. Would it be up to individual sellers to figure out the proper tax rate for customers in all 50 states, collect the tax and file the paperwork? 


There's an element of ideology in all of this as well. Some conservatives who generally don't like taxes are opposed to giving up the Internet as an oasis of tax-free commerce. The right-leaning Washington Times even disputes the idea that the marketplace is currently unfair to brick-and-mortar retailers.

“Store chains with physical locations have many advantages which offset tax disadvantages,” the newspaper notes. “They can attract casual and impulse buyers and allow them to examine their products with access which is impossible online. Their size and the bulk in which they buy products wholesale give them an advantage through economies of scale which allow them to sell products through their stores at substantially reduced prices. They can further undercut online retailers because they do not have to pay shipping to deliver each product.”


The real question, of course, is will having to pay sales tax on Internet purchases dampen consumer enthusiasm for the online marketplace? A study by Stanford University suggests it would – at least it would among eBay customers. Studying eBay's online marketplace, the researchers said they found “significant sensitivity to sales tax.”

While it might affect a few online retailers like eBay, a sales tax might not dissuade consumers from making an online purchase, according to some other industry experts. They argue that online retailers have a lot more advantages over brick-and-mortar competitors than no sales tax. Lower overhead, for starters, gives them a significant price advantage before taxes are even considered.

The reality may be that the mandate to collect sales tax will have an uneven effect. It might not affect traditional online retailers like Amazon but might be a negative for sites with a business model like eBay's. That's another reason why the fight in Congress over the issue may just be beginning and the Supreme Court, which was pulled into this argument 21 years ago, might be again.

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