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, exercise an additional sense of personal autonomy, and apply more scrutiny when looking at the quality of goods.
  • As online revenues have increased, states have increasingly imposed sales tax on items purchased online.

Attempts at an Internet Sales Tax

The Federal 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. The Marketplace Fairness Act was reintroduced in 2017 and attempted to levy a sales tax for online purchases made from businesses with no physical presence in the U.S. All of these legislative efforts to date have failed.

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 2022, 45 states and the District of Columbia require remote sales tax collection (with some states exempting small businesses below a certain amount of gross revenues).

States that require remote sales tax collection

Special Considerations

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.

Pros of an Internet Sales Tax

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 of 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.

Cons of an Internet Sales Tax

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 shifts 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.

Which States Do Not Levy an Internet Sales Tax?

Only five states in the U.S. do not collect sales tax from internet purchases as of 2022. These include: Alaska, Delaware, New Hampshire, Montana, and Oregon.

Which State Has the Highest Sales Tax?

California has the highest state sales tax as of 2022, with a rate of 7.25%.

Why Are States Allowed to Levy Internet Sales Tax?

States can impose sales tax on internet purchases, even if the seller has no physical presence in that state, as a result of a 2018 Supreme Court decision, South Dakota v. Wayfair.

Article Sources
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  1. U.S. Congress. "H.R. 2701 -- Main Street Fairness Act."

  2. U.S. Congress. "H.R. 3179 -- Marketplace Equity Act of 2011."

  3. U.S. Congress. "S. 698 -- Marketplace Fairness Act of 2015."

  4. U.S. Congress. "S.976 - Marketplace Fairness Act of 2017."

  5. U.S. Supreme Court. "17-494 South Dakota v. Wayfair, Inc."

  6. "Small Businesses and Sales Taxes."

  7. Tax Foundation. "State and Local Sales Tax Rates."

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