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Tax Breaks

Online Purchases Might Not Escape Sales Tax Much Longer

Legislation in Congress seeks to require online retailers to start collecting state sales tax on all purchases.

It’s no secret that shopping online can be a money saver not only because online retailers’ prices are lower (they lack the overhead that brick-and-mortar stores pay) but also because consumers can sometimes avoid sales taxes. That might not be the case much longer, though.

Legislation that would require online retailers to collect sales tax on all purchases is gaining support in Congress, says David French, senior vice president of government relations for the National Retail Federation, which launched a sales tax fairness campaign in May. There was a hearing on the bill, called the Marketplace Equity Act, in the House Judiciary Committee July 24. And the Senate Commerce Committee holds a hearing August 1 on its version of the bill, called the Marketplace Fairness Act.

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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 NRF.

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Some states, such as Virginia, have passed laws requiring online retailers to collect state sales taxes. Several states have tried to tackle the issue by aiming their efforts primarily at major online retailer Amazon.

Texas recently struck a deal with Amazon, which has a distribution center in the state. The online retailer began collecting sales tax in that state on July 1. Amazon already collects sales taxes on purchases made by consumers in Kansas, Kentucky, New York, North Dakota and Washington – states where it has a physical presence. It will start collecting taxes in California and Pennsylvania this September.

However, the NRF and its Main Street retail members believe that a state-by-state approach won’t solve the problem of what they consider to be an unfair tax system that favors online retailers. “The only satisfactory solution is a federal law giving states authority to collect” sales tax on all online purchases, French says. (Kiplinger Editor-in-Chief Knight Kiplinger agrees that online retailers should collect sales tax. See his Money & Ethics column on the topic.)

Stay tuned to find out whether Congress takes action to allow states to require online retailers to collect sales tax on all purchases.

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