The Logicbroker Blog

The new Internet sales tax, everything you need to know.

Jul 1, 2013 12:00:00 AM / by Guest Blogger

As a successful ecommerce company, it is necessary to keep track of pending legislations that could affect your business, such as the recent Marketplace Fairness Act. The act grants a state the right to impose sales tax at the time of transaction during an online purchase based on the tax rate in the location of the customer. But how did this act come about, and for what reasons is it still pending? Here’s everything you need to know.

Sales tax rates differ by state: for example, New York State’s sales tax is 4%, whereas California’s state tax is 3.5 points higher. Some states do not even have a sales tax, like Alaska, Delaware, Montana, and Oregon. State sales taxes can be combined with county and/or town sales tax, thereby increasing these rates. The sales tax in, say, New York City is 8.875% while Westchester County, NY’s is 7.375%, with the exception of a few towns.

Now, what is an Internet sales tax? An Internet sales tax is the taxation of the sale of goods through the Internet. As of now, an absence of an Internet sales tax has allowed web-based companies to thrive (e.g.: Amazon and eBay) and has allowed them to exercise an advantage over brick-and-mortar businesses. These retailers claim that web-based businesses have a significant and unfair price advantage. If an Internet sales tax were imposed onto online retailers, the brick-and-mortars and web-based companies would be on a more even level; however, still-growing online-only businesses would experience a disadvantage. Costs would increase for these still small businesses and could potentially lead to their downfall. The Internet sales tax is, therefore, a very controversial issue; while some see it as an effective way of generating more state tax revenue, others see it as a potential threat to small businesses.

In February 2013, the Marketplace Fairness Act was introduced to level the playing field for the smaller, growing retailers. However, before obtaining the authority to impose an Internet sales tax, the state must simplify its sales tax laws to facilitate multistate sales tax collection. For example, one of the five simplification mandates a state must meet is the use of destination sourcing to determine the sales tax rates for out-of-state purchases. If a consumer buys a product in, for instance, Connecticut, from a retailer in Ohio, the purchase is taxed at the Connecticut rate and not at the Ohio rate. The tax collected is then remitted to Connecticut’s state revenue.

The Marketplace Fairness Act is still pending due to divided opinion: could passing this act be considered a tax on the poor? Low-income consumers would now have to spend a portion of their disposable income on sales tax and will consequently have less money to buy goods and services. Less money would go into the economy and would slow it down rather than boost it and make it stronger.

If the Marketplace Fairness Act does pass and online sales tax is imposed, Avalara offers a world-class solution for sales tax automation for businesses. Rather than a company manually researching the sales tax for every state, county, and/or town, Avalara automates these processes and saves the company the headache of having to do it itself. To put it in their own words, they “provide the fastest, easiest, most accurate and affordable way to manage sales tax compliance.”

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