After months of speculation, the U.S. Senate has finally passed a bill that will impose a sales tax on e-commerce outlets and online retailers. The decision was made following a decisive 69-27 vote, and the proposed legislation will now face further scrutiny in the House of Representatives. If the so-called Marketplace Fairness Act passes into law, it will mean that even firms without a physical state presence must pay relevant sales taxes.
This move should come as no surprise, especially when you consider that U.S. citizens spent an increasing amount of their time shopping online in 2012. Rising by 1% in comparison with 2011's figures, the sustained popularity of e-commerce has forced brick and mortar retailers to call for a more even playing field and fairer tax legislation.
The Issue of Sales Tax and the Marketplace Fairness Act
The drive to implement an online sales tax has gathered pace in recent years, thanks to the efforts of leading retailers and local government authorities. In terms of the former, retail giant Walmart has lobbied extensively and led the charge to secure a change in the taxation law, with a view to eliminating the supposedly unfair advantage held by online businesses. Local authorities have also been keen to support the bill, primarily because states lost an estimated $12 billion in potential tax revenue to online purchases throughout 2012.
Under previous legislation passed in the Supreme Court in 1992, states could only order businesses to collect sales tax if they had a physical presence within the region. Regardless of whether this was a retail outlet or a distribution warehouse, firms with an established corporeal location were eligible to charge tax on their sales revenue. The Marketplace Fairness Act changes this entirely, however, as it affords independent states the authority to apply online tax to retailers that earn more than $1 million in gross sales each year.
Bringing the Bill into Law: A Natural Evolution
There are several evolutionary factors that have prompted the Marketplace Fairness Act, with the rising popularity of e-commerce among the most prominent. According to eMarketer, online retail sales in the United States will continue on an upward curve between now and 2017, with total revenue projected to rise from $258.90 billion to an estimated $434.2 billion during this time. Without a change in legislation, this set of circumstances would potentially enable online retailers to claim a greater share of the market while also benefiting from less stringent tax regulations.
While the changing nature of commerce and consumerism has contributed to the establishment of a Marketplace Fairness Act, technological advancement has also played a critical role. In previous generations, local authorities have refrained from imposing an online sales tax due to the complexities of independent state laws. Not only are the 45 states that apply sales tax governed by individual regulations, but rates also vary according to specific products and the accruement of additional charges. While the process of establishing a universal tax was deemed as both burdensome and unnecessary during the Supreme Court ruling of 1992, it is argued that modern technology makes it far easier to create an algorithm and software that automates the task of collecting sales taxes from businesses nationwide.
The Impact on Businesses and Consumers
While the bill is likely to face opposition within the House of Representatives, its implementation would have an impact on both consumers and businesses alike. On a fundamental level, consumers will no longer be able to benefit from purchasing tax-free items online, which may force those on a minimal budget to reconsider their choices of retailers. Research into how sales tax affects consumer decision making is limited, but a survey conducted by Forrester Research in 2011 revealed that 25% of consumers said their behavior would be impacted by the implementation and specific rates of sales tax.
The same study also suggested that one third of shoppers would remain unaffected by the implementation of sales tax, however, so the potential impact on consumers is hard to gauge. One of the key factors that will determine this is the growing influence of brand loyalty on the consumer, which should enable established online operators such as Amazon to implement a sales tax without compromising the popularity of its user-friendly platform. Another consideration is the rising rate of poverty in the U.S., which has a direct impact on the amount that certain households are able to spend and their subsequent attitude to saving and expenditure.
From a business perspective, the implementation of a sales tax will theoretically level the playing field upon which online and offline businesses ply their trade. Although sales tax rates vary considerably, from between 1 and 10% depending on individual states, their laws and any featured exemptions, retailers such as Walmart and Amazon have argued that the current legislation puts them at a 5 to 10% disadvantage by forcing them to charge sales tax on their transactions. While this may be a valid assertion, there is also an argument that the Marketplace Fairness Act will only serve to strengthen the monopoly of these leading brands while creating significant issues for medium-sized ventures that turn over a little over $1 million per annum.
The Bottom Line
With the suggestion that independent online retailers may consider reducing their sales to just under $1 million per annum in order to secure exemption from the proposed tax law, and the growing plight of the working poor, there is a growing sense that the Marketplace Fairness Act may ultimately allow retail giants such as Walmart to reinforce their dominance. This is the primary reason why several republicans have already opposed the tax on principle, and why it may yet struggle to complete the transition from bill into purposeful law.

Related Articles
  1. Investing News

    Approved: Paying Online Sales Tax

    States will now be allowed to collect sales taxes on purchases made from Internet-based retailers even if the retailer has no physical presence in that state.
  2. Taxes

    10 States With High Sales Taxes

    Most states have sales taxes of some kind for goods and services. Here's a rundown of the states that have the highest sales taxes.
  3. Taxes

    Congress Ready To Act On Online Sales Tax

    Congress is set to pass a bill that will give states the power to tax online sellers. But will it benefit Americans or just hamper online-based small-businesses?
  4. Taxes

    Why You Should Care About An Internet Sales Tax

    Many retail industry observers expect an online state tax bill to pass in 2012; if it does, how could it affect you?
  5. Taxes

    U.S. Sales Tax Rates Hit Record High

    Shopping blues: Top tax 12%. Chicago's 10.25% highest big-city rate. More Internet tax fights loom.
  6. Entrepreneurship

    How Does Glamsquad Work and Make Money?

    Learn about what Glamsquad does and how it makes money, including why the rise of the "Uber culture" has made this new luxury beauty business so popular.
  7. Taxes

    What IRS Form 990 Tells About a Nonprofit

    Want a picture of an organization's activities? This annual form, open to the public, sums up everything from salaries paid to missions accomplished.
  8. Retirement

    The 3 Most Common 401k Rollover Mistakes

    No one is born knowing the tax rules for 401(k)s and IRAs, but only dummies, scaredy cats and suckers don't buckle down to learn them.
  9. Taxes

    Top Reasons to File Separately When Married

    Most of the time, it makes sense for couples to file their taxes jointly. Except for these possible exceptions...
  10. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  1. Fast Fashion

    Definition of "fast fashion."
  2. Section 1231 Property

    A tax term relating to depreciable business property that has ...
  3. Duty Free

    Goods that international travelers can purchase without paying ...
  4. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  5. Transaction Authentication Number ...

    A one-time code used in the processing of online transactions.
  6. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
  1. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  2. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  3. What is the Social Security tax rate?

    The Social Security tax rate is 12.4% as of 2015. Of that amount, the employee is responsible for half, or 6.2%, and the ... Read Full Answer >>
  4. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  5. How is Social Security tax calculated?

    The Old-Age, Survivors and Disability Insurance program, or OASDI, tax is calculated by taking a set percentage of your income ... Read Full Answer >>
  6. Are my Social Security disability benefits taxable?

    Social Security disability benefits may be taxable if you receive other income that places you above a certain threshold. ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!