Monday, Nov. 28, 2011, was one for the record books. That day, ubiquitously known as "Cyber Monday" to shoppers and retailers, saw $1.25 billion leave consumer pocket books. That number was 22% higher than in 2010, according to the internet analytical firm comScore. (To help you with your holiday shopping, read 7 Tips For Shopping Online Safely This Holiday Season.)
TUTORIAL: Budgeting Basics

All told, comScore reports that online shoppers spent $26.8 billion from Nov. 1 to Dec. 12, 2011 – that's up from $23.3 billion from the exact same period in 2010.

Now, $26.8 billion is a lot of dough – but often, state and local governments can't get their meat hooks on so much of a nickel of that money.

Why? Because bylaw, interstate and online retail transactions aren't subject to taxes. That's right. Spend $100 down at the local mall, and expect in most states to pay 3%-to-8% in sales tax. But buy those same items online, and you pay no tax at all (although you will have to pay for shipping, but that's a story for another day).

Here are the current rules on online sales tax. Unless a retailer has a physical presence in a state, that online retailer is exempt from paying sales taxes. Indirectly, that makes the online consumer exempt from paying a sales tax on that transaction as well.

That's been the deal since 1992, after the U.S. Supreme Court ruled in Quill v. North Dakota that merchants don't have to collect sales taxes from out-of-state customers unless that retailer has what the court calls a "nexus" - an actual, physical operation (like a storefront or a warehouse) in the buyer's home state. So if doesn't have a distribution center or other physical site in Massachusetts, it doesn't have to collect a sales tax on that iPod purchase from the college kid in Boston. (For more, check out Comparing Online And In-Store Prices.)

Almost 20 years later, brick-and-mortar retailers are howling that their internet competitors have unfair leverage, as online merchants can charge cheaper prices for their goods and services since they are not subject to a sales tax.

Congress is finally lending a sympathetic ear to the brick-and-mortar retailer. Now, there are three bills being debated in Congress that would impose a sales tax on internet purchases. Each would impose the same state tax on brick-and-mortar purchases as it would online purchases, and each would mandate retailers to collect those sales taxes and forward them to state and local governments.

Nothing is ever guaranteed in Washington, D.C, but many retail industry observers expect some version of an online state tax bill to pass in 2012. (even Amazon has signed on to the idea of an internet tax bill, after years of fighting one.)

The impact on consumers would be moderate, but immediate. Most likely, online merchants would hike their prices to compensate for the amount of the tax. So in Rhode Island, where the state sales tax is 7%, expect that $100 satellite radio you bought from Best Buy online to rise by about $7 after the new tax rules are set in place.

Online retailers won't like it, but there's a sense that a mandatory state sales tax for internet purchases is inevitable.

For consumers, expect prices to rise on goods and services when the new taxes are green-lit by Congress. It won't be by much, but those price hikes will likely be enough to get your attention – and maybe make you think twice about making the purchase at all. (To learn more, read Is Online Shopping Killing Brick-And-Mortar?)

Related Articles
  1. Investing

    Top Websites to Start an Online Business

    The Internet offers nearly endless ideas and opportunities for new businesses. Here are some great resources to get your online business up and running quickly.
  2. Economics

    Understanding Forward Integration

    Forward integration happens when a business takes over functions that were originally performed by its partners farther down the supply chain.
  3. Stock Analysis

    What Puts the Dollars in Priceline's Bottom Line?

    The Priceline Group is more successful than it may appear and is on track to enjoy tremendous profits down the road.
  4. Active Trading Fundamentals

    How Groupon Makes Money

    Find out how Groupon makes money, including a rundown of how Groupon works and what benefits it provides to the businesses it partners with.
  5. Personal Finance

    How Express Scripts Makes Money

    The pharmacy benefit manager claims to lower prescription drug costs for consumers, medical providers, and health insurance companies and makes a tidy profit along the way.
  6. Stock Analysis

    Will Revolutionize Shopping? has arrived and will look to steal market share from Amazon over the next several years. Will it be successful?
  7. Personal Finance

    Why Best Buy Failed in China

    Best Buy entered China with much fanfare in 2006. The Minnesota-based retailer exited quietly last year. What went wrong?
  8. Personal Finance

    Don't Underestimate Kroger's Retail Power

    The grocery chain Kroger has been growing stronger thanks to strategies such as holding down costs, acquisitions, and a focus on convenience.
  9. Credit & Loans

    Why Cash Will Never Be Obsolete

    As long as the banking system remains strong and so many Americans remain unbanked, the United States will not have a cashless society.
  10. Personal Finance

    Is Amazon Killing the Best Buy Business Model?

    Best Buy's business model has been shaken up by Amazon. Its plan to adapt is working but needs to go further to avoid the end of Best Buy.
  1. Fast Fashion

    Definition of "fast fashion."
  2. Transaction Authentication Number ...

    A one-time code used in the processing of online transactions.
  3. Mail Or Telephone Order Merchandise ...

    A regulation that controls businesses that sell products over ...
  4. Online-To-Offline Commerce

    A business strategy that draws potential customers from online ...
  5. Card-Not-Present Fraud

    A type of credit card scam in which the customer does not physically ...
  6. Online Shoplifting

    The theft of goods from an Internet-based merchant.
  1. How can I invest in electronic retailing (e-tailing)?

    Electronic retail is one of the fastest growing segments of the economy. Every year, more people are choosing to purchase ... Read Full Answer >>
  2. What countries represent the largest portion of the global retail sector?

    The United States and China are the world's largest and second-largest retail markets, respectively, by total retail sales. ... Read Full Answer >>
  3. How has electronic retailing (e-tailing) changed the consumer discretionary goods ...

    Electronic retailing has changed the consumer discretionary goods sector by increasing price transparency and product information. ... Read Full Answer >>
  4. How does stock evaluation of an electronic retailing (e-tailing) business differ ...

    Stock evaluations of electronic retailers differ from brick-and-mortar businesses in that e-tailers have higher growth rates. ... Read Full Answer >>
  5. Who are Nordstrom's (JWN) main competitors?

    Nordstrom (JWN) is a high-end retail sales department store offering fashion, shoes and accessories for men, women and children. ... Read Full Answer >>
  6. What factors are the primary drivers of share prices in the internet sector?

    Economic conditions such as interest rates, unemployment and wage growth drive share prices in the Internet sector. This ... 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!