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Online Businesses May Soon be Forced to Collect Sales Taxes for Other States

Since its inception in the early nineties, the internet has become one of the most popular places for consumers to shop. Forrester Research estimates that, by 2015, the online retail industry will be worth $279 billion. This is partly due to the convenience of shopping online and the lower prices that result from the reduced overhead of online companies. Another reason for the boom in online shopping is the ability to often avoid paying sales tax. The National Conference of State Legislatures estimates that all states together lost out on $23 billion in uncollected sales tax last year. Currently, states can only compel out-of-state companies to collect taxes if the company has a physical presence in the state, such as an office, warehouse, or distribution center. This could soon change.

The Senate recently approved the Marketplace Fairness Act, which requires that online retailers collect sales taxes on behalf of all of America's state and local governments. Supporters say that this bill seeks to level the playing field between online retailers and local small businesses. Opponents say, among other things, that such a tax punishes online retailers in order to protect businesses who have failed to modernize. Opponents also argue that the bill, if it becomes law, will place an extraordinary burden on small online retailers, who must keep up with the tax laws of 9,600 state and local governments. Further, the online retailers can be audited by each state to ensure that sales taxes are being collected at the point of sale and paid over to the state. Under the bill, the definition of "state" includes 566 federally recognized tribes and Alaska Native Corporations, meaning that an online company could theoretically be audited by more than 600 "state" auditors. Business owners who fail to collect and pay sales taxes can be held personally responsible for the taxes.

Responding to concerns from small business owners, the Senate included an exemption for online businesses that generate less than $1 million in revenue. "WE R HERE," a coalition of small businesses, points out that the $1 million threshold is arbitrary and out-of-line with other definitions of "small business" used by the Federal Government. For example, the Small Business Administration generally defines small businesses as businesses that earn up to $30 million in revenue, while the Internal Revenue Service defines a small business as a business bringing in up to $20 million. If the proposed legislation used these definitions, more businesses would qualify for the exemption.

In another attempt to ease the concerns of small businesses, the proposed legislation requires states to adopt more uniform standards, to ease the burden of complying with so many different tax jurisdictions. According to the National Conference of State Legislatures, twenty-four states have already signed on to a national "Streamlined Sales and Use Tax Agreement" to simplify the collection process. California stands to gain the most tax revenue from the proposed legislation, followed by Texas and New York.

To learn more about state sales tax laws and regulations or about the state sales tax practice at Brown, PC, please visit our site online or contact us at 888-870-0025. 

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