Will small businesses face significant harm if Congress goes through with the Marketplace Freedom Act? The act gives states the authority to collect sales taxes from online sellers. There are two schools of thought on that issue. One school – call it the "anti-online sales tax bill" – says that the real harm may not come from lost sales for retailers, or from direct higher prices for consumers, it will likely come from increased compliance costs. And that paves the way for those higher price tags, as businesses must spend more financial resources just to keep up with the new sales tax regulations.

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Then there's the government's argument – that ending the loophole allowing online retailers to escape a sales tax would lead to smaller consumer and business taxes. (That argument rests, presumably, on states sharing that financial tax bonanza with taxpayers – not exactly a guarantee). By and large, the Marketplace Freedom Act (offered in the U.S. Senate) and the Marketplace Equity Act (offered for debate in the U.S. House of representatives) gives states the authority to force online retailers operating in their states to collect sales taxes from transactions, and pay those sales taxes to that state. (Own a small online business? You may like reading 10 Tax Benefits For The Self-Employed.)

What the debate really boils down to is the age-old acrimony between businesses (at least online ones) and federal and state governments. It's worth noting that there is a lot of cash on the line. According to the business analytical research firm comScore, total online retail spending in the U.S. in the first quarter of 2011 crested $38 billion – that's up 12% from the first quarter of 2010. The firm says the $38 billion represents the sixth consecutive quarter of double-digit growth for online shopping.

Here's a more detailed look at the growth of the U.S. online retail market:

Retail E – Commerce (Non-Travel) Growth Rates
Excludes Auctions, Autos and Large Corporate Purchases
Total U.S. – Home/Work/University Locations
Source: comScore, Inc.
Quarter E-Commerce Spending ($ Millions) Y/Y Percent Change
Q1 2007 $27,970 17%
Q2 2007 $27,176 23%
Q3 2007 $28,441 23%
Q4 2007 $39,132 19%
Q1 2008 $31,178 11%
Q2 2008 $30,581 13%
Q3 2008 $30,274 6%
Q4 2008 $38,071 -3%
Q1 2009 $31,031 0%
Q2 2009 $30,169 -1%
Q3 2009 $29,552 -2%
Q4 2009 $39,045 3%
Q1 2010 $33,984 10%
Q2 2010 $32,942 9%
Q3 2010 $32,133 9%
Q4 2010 $43,432 11%
Q1 2011 $38,002 12%

Not Thrilled
Some U.S. industry groups aren't exactly wild about the proposed law.

"We understand the need of states to address revenue collection based on legitimate sales taxes," offers Todd Thibodeaux, president and chief executive officer of CompTIA, a Washington, D.C.-based high technology industry association. "However, we must balance the states' authority to require businesses to collect foreign states' sales taxes with the compliance burdens that would be foisted onto small businesses. These additional compliance costs to small businesses would have a negative effect on employment and economic growth."

Thibodeaux argues that online retailers of a certain size are being singled out by Uncle Sam, and by state governments.

"This legislation would require businesses with remote sales of more than $500,000 to collect state sales tax in each state where that business has a single customer," he adds. "This unrealistically low threshold would create a complicated and costly compliance burden for small businesses. It would discourage small businesses from pursuing interstate commerce opportunities at a time when business activity should be fostered and encouraged."

Windfall for Businesses
But state government advocates disagree – they say the online sales tax will be a windfall for consumers and businesses. A pro-tax-based lobbying group, the Florida Alliance for Main Street Fairness says that changing the rules for internet-only sellers would "pave the way for reductions in the state's corporate, sales and property tax rates." A study from the organization says that "eliminating special treatment" for online retailers would boost Florida's tax coffers by between $449.6 million and $454 million in 2012. Both groups have skin in the game, and may be embellishing their debate points.

The Bottom Line
As the debate continues, some consumers are left to wonder - if some form of an online sales tax does pass – why is there a lingering feeling that the money to pay for it will eventually come out of their pockets?
(For more on shopping through internet retailers, check out Is Online Shopping Killing Brick-And-Mortar?, Comparing Online And In-Store Prices, and Shopping Online: Convenience, Bargains, And A Few Scams.)

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