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Kip Tips

Senate Approves Internet Sales Tax Bill

The Marketplace Fairness Act moves a step closer to becoming law and closing a loophole that allowed most online purchases to escape sales taxes.

Consumers might not be able to escape paying sales taxes on the things they buy on the Web much longer. That's because the Senate voted May 6 in favor of legislation that gives states the authority to collect sales tax on most online purchases.

SEE ALSO: Browse in a Store, Then Buy Online: Is This Fair?

Under a 1992 Supreme Court ruling, online retailers are not required to collect sales tax from customers in states where they don’t have a physical presence such as a store or warehouse. Technically, consumers who escape the sales tax online are supposed to pay a “use tax” for those purchases on their state income-tax return if they live in one of the 45 states with a sales tax. Few actually do, and as a result states are losing out on an estimated $24 billion in sales-tax revenue, according to the National Retail Federation.

The Marketplace Fairness Act, which the Senate voted 69-27 to approve, would close that loophole. The bill won't affect all online purchases, though. Retailers with less than $1 million in annual sales in states where they don't have physical operations will be exempt.


Brick-and-mortar retailers and trade groups such as the National Retail Federation have been pushing for this legislation for years because they claim that the current system unfairly favors online retailers. (Kiplinger Editor-in-Chief Knight Kiplinger agrees that online retailers should collect sales tax. See his Money & Ethics column on the topic.)

Consumers don't need to worry about paying more for online purchases quite yet, though. The issue now goes to the House of Representatives for consideration. However, President Obama does support this legislation, so it likely will become law if the House approves it.

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