Internet Sales Tax: Pros and Cons

Over the years, several bills have been introduced to set codified rules regarding the taxation of goods sold over the Internet. Those in favor include brick-and-mortar retailers who have seen much of their business undercut by cheaper online pricing. Those against include Ecommerce advocates, who argue that in order to survive, new and emerging businesses need to be free from certain government regulations to grow.

Key Takeaways

  • Internet sales are encouraged by the sales-tax-free environment that still exists in many places today.
  • The Internet sales-tax-free environment has encouraged consumers to purchase goods from out of state, to exercise an additional sense of personal autonomy, and to apply more scrutiny when looking for quality in goods.
  • As online revenues have increased, states have increasingly imposed sales tax on items purchased online.

Attempts at an Internet Sales Tax

The bills that have been voted on include the Main Street Fairness Act of 2011, the Marketplace Equity Act of 2011, and the Marketplace Fairness Act of 2015. While the first two of these failed to be ratified, the Marketplace Fairness Act of 2015 is being reviewed for consideration by the committee before it is introduced to the Senate or the House as of November 2015.

In 2018, a supreme decision was made in the case of South Dakota v. Wayfair that has set the current standard for states looking to tax sales made out of state by remote or online sellers. The Court ruled that it is up to each individual state to decide how they are to implement remote tax sales laws. As of 2020, 43 states and the District of Columbia require remote sales tax collection (with some states exempting small businesses below a certain amount of gross revenues).

How It Happens

To be considered by the president for approval, a bill must pass in both the U.S. Senate and the House. While the Fairness Act would not impose any taxation of Internet sales on the federal level, it would allow individual states to impose base state-wide taxes.

As Americans inch closer to the possibility of certain Internet sales transactions being taxed, business owners, consumers, and retail outlets should consider how they might be affected by a nationwide Internet sales tax. While tax revenue may aid local and federal infrastructure along with sponsored programs, consumers will need to compensate by paying higher prices on goods that may have previously been attractive because they were cheaper than goods found in local stores.

The Pros

By placing a tax on Internet sales, the government collecting the tax revenue can use it to add to current infrastructure and government-sponsored programs, or it may put the funds toward debt repayment. By placing a tax on Internet sales nationwide, the government would be likely to reap a hefty source of additional revenue.

Most of the revenue would come from the largest online retailing sources, such as Amazon and eBay. Considerably less revenue would come from small niche and specialty stores. The benefits of the added tax revenue will largely depend on how the government allocates the additional funds.

The increase in overall prices on goods caused by the introduction of the sales tax will encourage additional competition between virtual and brick-and-mortar stores. While a vast majority of transactions are still conducted in stores near where consumers live, these stores have undoubtedly lost customers as a result of e-commerce.

The Cons

Since Internet businesses at times appear to operate out of ambiguous locations, the enforcement of these laws and the identification of nexus, which is the state or principality in which the business identifies itself as associating in geographic terms, may be difficult and time-consuming for regulators. Large businesses with operations contingent on a level of transparency, as is the case for Walmart, do not suffer from difficulties in establishing nexus.

It is also unclear how the government will impose laws on the Internet. Imposing regulations on online retail might be excessively difficult right now, but as the percentage of sales transactions shift toward the virtual and away from the physical, governments will be increasingly aware of the lost tax revenue.

If goods purchased over the Internet are taxed, this will raise the prices of the goods to the consumer. It will drive people back into brick-and-mortar stores to shop, which may help local economies, but could also hurt the growth of the free market in America. The ability to conduct business without sales taxes has been an attractive facet for owners of new businesses who do not have the starting capital or the time to rent out a physical location.

Imposing regulations on online retail may be difficult, but as the percentage of sales transactions shift toward the virtual and away from the physical, governments will likely be more aware of the lost tax revenue.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. Congress. "H.R. 2701 -- Main Street Fairness Act." Accessed Feb. 6, 2020.

  2. U.S. Congress. "H.R. 3179 -- Marketplace Equity Act of 2011." Accessed Feb. 6, 2020.

  3. U.S. Congress. "S. 698 -- Marketplace Fairness Act of 2015." Accessed Feb. 6, 2020.

  4. "Small Businesses and Sales Taxes." Accessed Oct. 4, 2021.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.