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Internet Sales Tax—Marketplace Fairness Act of 2013

In a vote on May 6, the U.S. Senate passed the Marketplace Fairness Act of 2013, which would give states the power to require all out-of-state online retailers to collect sales taxes on goods purchased online and shipped to its residents.  In other words, the new legislation would require online retailers to collect the same sales tax from the consumer as if the consumer had purchased the item at a store.  The bill, as it stands now, includes an exception for retailers that generate less than $1 million in annual out-of-state revenue. 

Currently, online retailers do not have to collect sales taxes on goods sold to consumers outside of the states where the retailers are based.  In many states, including Maryland, it is the legal responsibility of the consumers to report purchases made across State lines and to pay a Use Tax on those purchases when they file their annual tax return—an obligation that most consumers ignore or evade.  Consumers regularly get away with this tax avoidance because it is difficult for the State to enforce this law.

How much potential state tax revenue is being lost?  According to the U.S. Department of Commerce, there were $225.5 billion in online sales in 2012.  The National Conference of State Legislators and various reports estimate that states lost out on a combined $23-$24 billion in uncollected sales tax revenue per year.   

In Maryland, all retailers—online and those with a physical presence—are required to collect a 6 percent sales tax on many goods.  Sales tax generated nearly $4 billion in tax revenue for the State in 2012.  The Maryland Comptroller’s Office has estimated that the Marketplace Fairness Act would increase annual tax revenue in the State by $173 million per year. 

Why haven’t retailers been required to collect the tax previously?  The primary reason for not requiring retailers to collect sales taxes for products sold across state lines is that it is just too burdensome for the businesses.  Businesses would have to be familiar with the various sales tax laws and tax rates for each of the 45 states that have sales tax laws.  In addition, businesses would have to know the tax rates specific for the type of good being sold.  For example, in certain states, certain grocery items might be tax free or have a lower tax rate than other goods.  Businesses would also have to be aware of the local sales tax rates applicable within each state.  For example, certain goods might be exempt from state sales tax, but still subject to tax by the local sales tax rate.  Businesses would face a significant burden in administrative and accounting responsibilities for the accurate collection and paying of the sales tax for purchases made by its consumers in each state.     

With the expansion of Internet commerce and the advancement of software, supporters of the new legislation argue that this burden is lessened by current technology that makes it possible to simplify and automate the task of collecting sales taxes for various states by online retailers.  The Marketplace Fairness Act requires state governments who want to require online retailers to collect the tax to provide the companies with free software for calculating taxes and set up one state entity to receive the payment from the retailers.

The Marketplace Fairness Act still needs to pass the House before it can become a law.  The bill is expected to face more resistance in the Republican-controlled House than it did in the Senate.  Expansion of states’ taxing authority and undue burden on small businesses are among the predominate concerns. 

Nevertheless, Maryland General Assembly officials have already stated how they plan to allocate the increased sales tax revenue if the Act is passed.  The General Assembly just approved legislation that is expected to increase the State’s 23.5 cents per gallon gas tax by approximately 20 cents by mid-2016; however, officials have stated that this gas tax increase could be mitigated by about 7 cents if the Marketplace Fairness Act is passed.  

The earliest the Marketplace Fairness Act could go into effect is October 1, 2013. 

To track the status of the Act, Senate Bill 743, and to review a public source copy of it go to any of the following websites:

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