For years retailers have complained that their online rivals in the US have an unfair tax advantage because they do not always collect sales tax. On Monday, amid intensive lobbying from retailers including Walmart, the Senate took a step closer to "leveling the playing field" by voting through the Marketplace Fairness Act. The act is supposed to simplify the byzantine sales tax system across the US. But critics charge it's unfair and have vowed to fight on.
What is the Marketplace Fairness Act?
At its basic level the act grants states the authority to compel online and catalog retailers ("remote sellers") with gross sales over $1m a year to collect sales tax at the time of a transaction - just as local retailers are already required to do. A version needs to pass in the House for it to become law.
Who pays sales tax and how much?
Sales tax rates vary widely and range from less than 1% to over 10%. There are myriad exemptions and exceptions and rates vary across types of goods and services as well as cities and even counties. Clothing and footwear under $110 is tax free in New York City, for example. But buy something worth more than $110 in Manhattan and the item is subject to a 4.5% city sales tax and a 4% state sales tax. Sales taxes are collected in 45 states, the District of Columbia and Guam. Five states, including Alaska and Montana, do not collect sales taxes.
How much money is at stake?
States depend on sales and use taxes for an average of 20% of their annual revenue. According to the bill's backers states were unable to collect as much as $23bn in revenue for the 2012 tax year alone.
But I already pay tax on online purchases
Sometimes. If an online retailer has a physical presence in your state, they already have to charge the local sales tax as if you had bought it in the store. Buy a pair of pants from Gap.com, for example, and the chances are they have a store in your state and you will be charged sales tax. Similarly if an online-only retailer has a physical presence in a state, eg a distribution center, the same rule applies. Amazon, the largest online retailer, has "fulfillment centers" in 14 states and "customer service centers" in another three.
Also you are supposed to declare the fact that you have not paid tax on goods bought out of state or online and then pay that tax with your state taxes. A lot of people either don't know this or don't do it which is why the bill's backers want to pass the tax collecting duties on to the retailer.
This sounds complicated
It's worse than it looks. If the burden of collecting the tax is passed to online retailers, they would have to deal with more than 9,600 tax-collecting jurisdictions, including state and local governments. The act says states will only be granted this authority after they have simplified their sales tax laws. At the moment 24 states have signed up for the streamlined sales and use tax agreement (SSUTA) - an attempt to simplify sales tax for retailers, especially those operating in multiple states, whether they sell on or offline.
States who are part of SSUTA, including New Jersey, Ohio and Wyoming, would have the authority to collect online sales taxes under the new act shortly after implementation.
States that have not signed up for SSUTA would have to meet five "simplification mandates" including the provision of free software for retailers to manage compliance with the new system.
Why is it so complicated?
The sales tax regime was built when interstate commerce was less common and internet shopping didn't exist. The US supreme court has ruled twice on the issue, once in 1967 and once in 1992, and concluded that out-of-state retailers should be protected from the obligation to collect local sales tax because it would place too much of a burden on their businesses.
The bill's proponents argue that technology has superseded that view. Shoppers now cross state lines at the click of a mouse. At the same time cheap, readily available technology exists to allow retailers to deal with the tax consequences of that change.
So who's in favor?
President Barack Obama for one. Also Republicans including senator John McCain. Brick-and-mortar retailers, including Walmart. who have complained the internet has been getting a free ride, have been pushing hard for the bill. As has Amazon, once a fierce critic of online sales taxes and now the bill's most active online proponent.
And who's against?
You are. A recent Quinnipiac University poll found 56% of voters were against the tax and only 37% were for it. Senior Republicans including senator Marco Rubio, potential presidential hopeful, are also against it as are the usual anti-tax groups including Americans for Tax Reform. Smaller online retailers are against the bill, as is eBay. which argues the complexity of implementing the bill will unfairly penalize its sellers.
What happens next?
The Senate passed the bill, but it is likely to face stiffer opposition in the House where anti-tax Republicans are likely to take a tougher stance against the bill. The bill does, however, have the backing of many cash-strapped states – even Republican ones. No date has been set for a hearing or vote yet but expect a lot of shouting from both sides before this bill becomes law.