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The Tax-Free Internet Shopping Era May Be Over

Daily Ticker

Consumers shop online for many reasons. Convenience. Good deals. And for some individuals, the lack of sales tax. Not all Internet companies charge sales tax on e-commerce purchases. In many states, an online retailer adds the applicable sales tax only if it has a physical presence in the state where the item was purchased. Consumers who do not pay online sales tax are required by law to report a “use tax” when they file state and federal taxes every April.

According to David French, senior vice president of government relations at the National Retail Federation, 45 states are losing an estimated $24 billion every year because of unreported Internet purchases. But a new bipartisan bill gaining traction in Congress may forever end the illusion that digital commerce represents a zero-tax environment. Republican Sen. Mike Enzi of Wyoming, a sponsor of the Marketplace Fairness Act, has brought the bill to the Senate floor as an amendment to the budget resolution. The bill would ensure that all retailers -- brick-and-mortar and online -- collect and report sales tax. Even online retail giant Amazon (AMZN), who has been battling states for years over the sales tax issue, backs the proposal. (Amazon is building new distribution centers across the country and will begin collecting sales tax in a handful of states later this year).

Related: Why Amazon’s State Sales Tax Could Be Good for Customers

French argues that the bill fixes a “constitutional anomaly” and does not impose a new tax on consumers.

“People perceive digital commerce as tax-free but in fact they’re technically violating the law by not paying the use tax,” he says in an interview with The Daily Ticker. “The rise of digital commerce has created challenges for state sales tax laws…[the Marketplace Fairness Act] modernizes the parameters for the twenty-first century.”

EBay (EBAY) has become one of the most vocal opponents of the Marketplace Fairness Act. Brian Bieron, senior director of global public policy at eBay, provided the following statement to The Daily Ticker:

"eBay opposes the current legislation which would establish an unprecedented national-scale state sales tax collection mandate that will harm small businesses using the Internet and raise prices for consumers who shop online. This legislation would force small business owners to become tax collectors for every state across America and would threaten them with audits and litigation by tax collectors for states that are thousands of miles away from where they live and work."

Brick-and-mortar retailers have insisted for years that they are at a disadvantage and are losing business to e-commerce sites. According to the U.S. Commerce Department, e-commerce sales totaled $225.5 billion in 2012, an increase of nearly 16% from 2011. E-commerce sales accounted for 5.2% of all sales last year.

Related: Retail Sales Rise But Consumer Is Not Back: Analyst

French denies that the Marketplace Fairness Act will adversely impact Internet sales.

“The perception that it’s tax-free is only one portion of the reason people shop online,” he notes. “It won’t affect people’s online shopping habits.”

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