How Will the Internet Sales Tax Affect Your Business?

On May 6th of this year, The United States Senate passed the Marketplace Fairness Act, which will require online retailers to collect the sales tax for the states that they ship their merchandise to. The legislation still needs to be passed in Congress, but it appears to have enough support to be voted into law.

Up until now, retailers were only required to collect sales tax on items shipped to a state where they had a physical presence, consisting of either a storefront or distribution center. It was considered too much of a burden to require a business to collect sales tax for every one of the 45 states that have a state tax. Not only do different states have different sales tax rates, but many states have different rates depending on what the item is that’s being sold. Currently, consumers are required to report purchases made out of state and pay a Use Tax, but most are either unaware of, or ignore the requirement.

If collecting this tax was previously considered unfair to retailers, what makes it acceptable now? The last time that this issue was presented to the Supreme Court, the internet had not yet seen e-commerce, and computer software was quite primitive in comparison to today’s functionality. Today, it would be relatively easy to install software that automatically calculates the taxes that are due and sends the payment to the appropriate state tax collection department.

Which businesses will be affected by this new law? Any company with more than $1 million in annual online sales revenue would be required to conform to this law. 

No details have been presented on what the government will require of businesses to comply with the law, or how they intend to collect the taxes that they feel they are entitled to. If the law passes, it will be a minimum of 180 days before it will take effect. In the meantime, it may be wise to assess how this legislation could impact your business.

Adam Irby