Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Apr 24, 2013

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The Senate is on the verge of passing a new bill known as the Marketplace Fairness Act which will allow states to assess sales tax to online retailers for every transaction – something that is currently only possible if the retailer has a distribution center in the state.  The bill is the culmination of a long battle involving states, big box stores, and online retailers of all sizes over the right to tax remote purchases, and its likely passage in the Senate coincides with large online retailers such as Amazon and EBay shifting positions in support of the measure.

Changing the Remote Tax Paradigm

States have long been unable to tax online sales made outside of state borders, leaving the responsibility on the consumer to self-report purchases made online on their tax returns.  Unsurprisingly, this is a universally ineffective way of collecting sales tax, and a recent study suggested that states collectively lose out on up to $11 billion in sales tax each year by being unable to tax sales by remote vendors.  For the past several years large online retailers led by Amazon have aggressively, and successfully, lobbied to maintain this status quo, however, the winds of tax have begun to shift – fanned by big box stores and local business who argue that they risk being priced out of the retail market against online retail.  With members of Congress facing pressure from businesses in their voting district, and remote taxes easier to keep track of due to advances in technology, the arguments against the law have weakened, leaving the door open to tax online sales regardless of where the product ships from.

Large Online Retailers Jump Sides

As the political sentiment shifts in favor of the Marketplace Fairness Act, large online retailers have flip flopped on the issue.  Companies like Amazon and Overstock have retreated from opposition to the measure, and, with the financial strength to survive price increases caused by additional taxes and the technological support to keep track of thousands of local tax rates, they seem prepared to absorb the downsides without a fight.  Amazon has likely been preparing itself for the logistics of paying taxes in every state anyway – the company is increasing its number of distribution centers to deliver next day service – and continuing the fight against this type of legislation is no longer part of the agenda.

While the tax playing field will be leveled, companies like Amazon are well entrenched in the market and seem to be prepared to manage the logistics of the change and overcome the competitive boost that local big box stores hope to gain – clearing the largest, and wealthiest, hurdle supporters of the law faced.  With large company opposition waning, and political support waxing, the Marketplace Fairness Act seems an inevitability.

Small Online Retailers Face New Challenge

While larger companies can overcome the logistical difficulties posed by the change, there is legitimate concern that small online retailers will be unable to support the requirements of the new law or survive the increased competition from local big box stores.  Although the Act exempts companies that make less than $1 million a year, EBay (the largest company still opposing the measure) points out that for retailers that amount is not enough.  Many companies that make more than a million in sales may find themselves unable to keep up with thousands of local tax rates.

Supporters of the law have argued that the logistics of paying tax rates around the country – long a concern in passing this type of legislation – have all but disappeared.  Technology, supporters argue, has made tracking sales tax rates far less onerous than in prior years, and any burdens online retailers may face is worth the cost in order to ensure local business are not disadvantaged.  The argument is easy to make, but might not be worth believing at face value.  In an interview with the Wall Street Journal, Overstock.com’s CEO stated that the cost of upgrading the company’s systems to accommodate the change exceeded $1 million.  While this number may take many things into account, the statement serves notice that the logistics of the change are not so easily downplayed. 

The Marketplace Fairness Act seeks to level the playing field between online and local stores – and it may move towards that goal – but as it steams its way through Congress the legislation may run over a number of small retailers that can’t compete in the new online market.  With only quiet voices in opposition remaining, it appears time will have the opportunity to reveal who gets left behind as tax law marches on.