Federal Bill To Slap Online-Sales Tax Afoot

Digital Journal, April 28, 2009.

The heyday of online shopping experience, with its attractive package of easy convenience and tax-free pricing, may soon be over.

A proposed federal online-sales tax bill, currently being drafted, and due to be tabled before the Congress, would make it mandatory for large online retailers to collect sales tax on the sale of merchandise. Small ventures with inconspicuous businesses will however, not be required to do so.

So far, New York is the only state to have such a law. Since June 1, 2008, The Empire State has required all virtual companies to collect a sales tax even though they may not have any “physical presence” in the state, in terms of a store, a warehouse, staff, etc.

With the country facing its worst financial downturn since the Great Depression, many economically hard-hit states are contemplating copycat legislation. The move is being viewed as an effective avenue for recouping state revenue, lost as a result of the recession.

Research conducted by a team of University of Tennessee professors, published in BusinessWeek—projects that online-sales taxes could bring in much as $52 billion in state revenues over the next six years.

E-commerce ventures Overstock and eBay are against the idea in its entirety and are spearheading a resistance movement of Web players against Capitol Hill.

Giant e-retailer Amazon, on the other hand, has a beef with only the New York law. It isn’t opposed to having a uniform, nationwide version—a view that might find favor with behemoths like Wal-Mart, who’re required to collect taxes on two fronts—online as well as through brick-and-mortar stores.

Last year, when the law came into effect in New York, Amazon, and Overstock each filed a suit against the state on grounds that it was unconstitutional.

In the 1992 Supreme Court case, Quill versus North Dakota, the court held that states can obligate remote merchants to collect sales taxes only in regions where they have operations.

Further, “[it said that the] existence of customers alone (that is, an economic presence) did not create sufficient nexus under the Commerce Clause for North Dakota to impose a sales tax collection burden on Quill Corp,” writes Tax Foundation staff Chris Atkins.

So, to circumvent the legal problems arising out of this verdict, New York amended its law to state that if an e-retailer had a New York-based partner (a blog or a Web site), then, that qualified as a presence in the state and hence, made it liable for tax collection.

Though consumers may not feel the pinch of online taxes on small purchases, they’ll certainly feel its effects when buying big-ticket items.

Senator Mike Enzi, a Republican from Wyoming and Representative Bill Delahunt, a Massachusetts Democrat, are lobbying to overturn the 1992 ruling.

Though it’s still premature to predict how their victory will impact the online spending habits of shoppers, it’s clear that the new legislation will go a long way in replenishing the nation’s depleting coffers.

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