In most of America, if you shop, you pay sales tax. Except in the five states that don't charge a tax on sales, shopping for many items can cost you 4% to 10% in state and local taxes. Yet for years, Amazon.com (NASDAQ:AMZN) and countless other online-only retailers have enjoyed the advantage of not having to collect sales tax from shoppers who live outside of states in which those retailers have a substantial presence. Now, though, some lawmakers are pressing hard for a federal bill that would force out-of-state retailers to collect the taxes that state governments impose on in-state online shoppers. With this Marketplace Fairness Act still pending in the House of Representatives after passing through the Senate, shoppers need to keep their eyes on Washington to see if their holiday shopping will lead them to take a new tax hit.
The fairness of online sales taxes
The need for a law at the federal level stems from Supreme Court decisions that set limits on the power of states to impose taxes on retailers outside their borders. For decades, well before the rise of the Internet, mail-order retailers gave shoppers the ability to avoid sales tax on their purchases so long as they were outside the state in which that retailer was based. Court decisions found that unless a mail-order company had a substantial presence within a state, that state couldn't impose the obligation to collect sales tax on its behalf.
In the e-commerce era, courts have generally followed those Supreme Court decisions to similar endpoints. Amazon, for instance, has always collected sales tax in the state of Washington, where it's based. It also collects taxes in those states in which it has distribution centers or other physical presence. Moreover, in response to legislative efforts in many states to foster greater sales-tax collection, Amazon has agreed to collect sales tax in some jurisdictions despite not having a traditional physical presence within those states. Nevertheless, other large online retailers haven't necessarily followed suit, and with an estimated $23 billion in annual sales-tax revenue at stake, parties on both sides of the issue have big reasons to fight hard.
Proponents of the measure argue that local economies would benefit from an even playing field -- i.e., if customers of Amazon and other online retailers had to pay the same sales tax as they do when they shop locally, then they'll be more likely to stay closer to home and bolster business activity in their own communities. Yet opponents of the measure respond that the real beneficiaries would be the big-box retailers with major brick-and-mortar store locations nationwide, which wouldn't have to overcome the handicap of sales taxes as they try to compete on price.
Why sales tax matters -- even though it shouldn't
Theoretically, the question of sales tax collection should be irrelevant. Even if retailers don't collect taxes, customers still have an obligation to pay what's known as "use tax" on their out-of-state or online purchases. Yet because use taxes are nearly impossible to enforce, states haven't aggressively gone after ordinary citizens for use-tax liability, instead relying on the ordinary sales-tax collection infrastructure to bring in revenue.
With the speaker of the House opposed to the Marketplace Fairness Act, shoppers probably don't need to worry about a Cyber Monday surprise this year. But with legislators looking for ways to compromise on other issues in order to get support for the bill, the huge savings that many online shoppers have enjoyed for years could go away in the near future. That could spell a big shift in behavior among online shoppers, and it could put a big dent in the massive growth of online retail while easing the relatively tough conditions among traditional retailers.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.