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Archive

Tax-Free Online Purchases May Be Ending

Steven Aldrich is CEO of Outright

The phenomenal success of online businesses has refreshed the nation. In the wake of one of the worst recessions in US history it has also, however, drawn scrutiny from Washington. Today, many lawmakers are anxious to start taxing these online establishments but after the fiscal cliff negotiations began last year, efforts to pass laws stalled. Now, it seems imminent that Congress will take up these issues again — soon.

Before discussing the Acts of last year and the expected future, a brief history of online legislation is in order to understand the current economic and policy scenario. The beginnings of the online sales tax debates precede the Internet with cases in the 1960s relating to out-of-state businesses. However, the pivotal Supreme Court case that has upheld online retailers' right to not collect and remit sales tax up till now was Quill vs. North Dakota in 1992. In the case, the Supreme Court ruled that while Quill, a retailer that was selling out of state, did qualify for use tax, the company was not required to collect sales tax because it did not have a presence in North Dakota. What this meant was that buyers of products were responsible for paying use tax on their purchases. The retailer was not required to collect sales tax.

As can be seen, in the letter of the law a tax on online goods has always existed. However, use tax collections have been difficult to enforce for the government. As online sellers have gained steam over the past decade lawmakers want to institute legislation that will supersede Quill vs. North Dakota and require sellers to collect and remit sales taxes. In 2012, three bills were introduced to make this a reality. They were called Marketplace Fairness Act, Marketplace Equity Act and Main Street Fairness Act. All these laws sought to do two things: encourage states to streamline their tax code to make it feasible for online sellers to collect taxes for the various jurisdictions, and, require online sellers to collect the streamlined taxes on behalf of the states. There were also varying exemptions for small businesses, which were below a threshold of either $500,000 or $1,000,000 of gross revenues. Of these bills the Marketplace Fairness Act was the frontrunner.

Because of the focus on the fiscal cliff negotiations none of these laws passed but now there is a chance they will be back in the running. It is currently unclear whether the same bills will be re-introduced or new bills will be formulated. Regardless, many lawmakers have indicated their interest in pursuing the issue. Additionally, many states have taken measures to collect sales tax within their jurisdictions. Indiana for instance has levied a flat 7 percent sales tax on online purchases and e-tailers are required to collect. Amazon.com, the Goliath of online sellers, has also come to agreement with states such as Connecticut to collect sales tax for them.

As can be seen, the reign of tax-less online purchases might be over. Consumers should expect to pay taxes on what they buy very soon. For small businesses that do not have the resources of big online retailers, it is hoped the laws that pass will have adequate exemptions. As we at Outright found in conversations with our customers — traditionally online sellers — there is deep nervousness legislation will throttle the growth many businesses have seen in a tough economy.

For this very reason, it is of utmost importance for small businesses to pay attention to movements in the legislature. Given the bipartisan support received by the Acts introduced in Congress in 2012, it is likely that some form of legislation will come to pass in 2013. If an Act similar to the Marketplace Fairness Act passes, businesses would have to change the modus operandi for day to day rather drastically. Given that, businesses should maintain contact with their local Congresspersons and urge them to protect the small businesses that have just seen the cusp of success. The way to do that is by ensuring exemptions are made for businesses making revenues over a generous threshold and by mandating states' tax code simplification if taxes are to be collected by businesses. By maintaining a watch out on Congressional activity and petitioning lawmakers in their areas, online small businesses can fight and have their interests represented.

Recent years saw some of the worst economic downturns in the United States. Online marketplaces gave entrepreneurial Americans an avenue to turn their fortune around. As their hard work and determination has started to pay off, it is important for lawmakers to take their interests in consideration as they create new laws. Regardless of what turn legislation takes though, we are confident that small businesses as gritty and resilient as our users at Outright, will find a way to thrive.

The views expressed are those of the author and do not necessarily reflect the views of BusinessNewsDaily.

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