Fairer Sales Tax Rules Take a Big Step Forward

April 23, 2013 at 3:24 pm

The Senate’s overwhelming (74-20) vote last night to open debate on the Marketplace Fairness Act (MFA) all but guarantees that it will soon approve the bill, which would enable states and localities to require all large Internet retailers to charge any applicable sales taxes on their interstate sales.

Right now, as a result of 1967 and 1992 Supreme Court decisions, a state can require out-of-state companies to charge its sales tax only if they have a physical presence in the state like a store, warehouse, or sales force.  The tax is still legally due, and consumers are supposed to pay it directly to their state, but few people know about or comply with this requirement.

MFA would largely solve the problem.  It authorizes states to require out-of-state sellers with more than $1 million in nationwide interstate sales to charge the applicable taxes — provided that states simplify their sales taxes and give merchants free software that automatically calculates the correct tax.

This long-overdue legislation would:

  • Give state and local governments as much as $23 billion in annual revenues that they are owed under current law. That will help them maintain public services and possibly reinvest in services they cut during the recent recession — rehiring teachers, freezing college tuition increases, and resuming road and bridge maintenance, for example.
  • Create a more level playing field for local store-based retailers. Because combined state and local sales tax rates typically range between 5 and 10 percent, Internet retailers that don’t collect sales taxes outside their home states start out with that much of a price advantage over their local competitors.  This makes it harder for Main Street merchants to create local jobs.  It also has a ripple effect on local economies, as depressed sales at the neighborhood book or musical instrument shop lead to fewer purchases by their owners and employees at the farmers’ market and dry cleaner.
  • End the unfair sales tax treatment of consumers who don’t shop online. Low-income people who lack the computers, Internet access, or credit cards needed to conveniently shop online pay more than their fair share of sales taxes because online shoppers can avoid these taxes.

Last night’s vote is just the first step towards the MFA’s enactment.  Senate opponents will likely to offer amendments to weaken or kill it, and the measure will likely get a cooler reception in the House.  But, for now, kudos to the majority of senators from both parties who recognize that Internet retailers should play by the same tax rules as local retailers.

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More About Michael Mazerov

Michael Mazerov

Mazerov joined the Center staff in January, 1998. He is a Senior Fellow with the Center's State Fiscal Project.

Full bio | Blog Archive | Research archive at CBPP.org

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