Death of internet sales tax law helps online sellers, hurts Main Street

Republicans in Congress have all but killed off the Marketplace Fairness Act, a long-debated bill that calls for online retailers to collect sales tax in the same way as brick-and-mortar stores. The news is a victory for e-Bay and small online retailers, but a defeat for Wal-Mart and traditional retailers who say that internet sellers have an unfair advantage because they can sell their inventory for at cheaper prices without the tax.

The final demise of the bill, which has been kicked around Congress for years, came this week when House Majority Leader John Boehner (R-Oh) said he would not take action to move the bill forward in the lawmakers’ final session next month. There is little chance the next Congress will revive the bill since most Republicans, who won big in mid-term elections, are opposed to the idea of expanding online tax collection.

This doesn’t mean all online retailers are excused from collecting state sales tax, however. Currently, the law requires retailers with a physical presence in a state, such as a warehouse, to collect the tax if they sell to someone residing in that state.

[company]Amazon[/company], for instance, already collects sales tax in states like New York and California, and even came out in favor of the Marketplace Fairness Act. The Wall Street Journal, however, attributed a more cynical motive to Amazon’s support for the bill:

“Amazon and other retail giants see it as a way to hobble their smaller competitors by burying them under a blizzard of audits and collection burdens that don’t exist offline,” said the Journal in an editorial.

The publication has long taken the side of conservatives who have opposed the bill, arguing that it would subject small online businesses to more than 9,600 state and local taxing authorities. Supporters of the bill, however, have said such concerns were overblown and pointed out that the law would have provided the businesses with free tax software to collect and remit sales.

Lobbyists for the retail industry, who say sales taxes mean higher prices of five to ten percent for brick-and-mortar stores, had tried to tie the Marketplace Fairness Act to another piece of internet tax legislation that is expected to pass in December — that bill concerns a ban on internet access taxes, now in force, that will expire in three weeks unless Congress renews it.

The failure of the Marketplace Fairness Act is also a victory for states like New Hampshire and Oregon that have no sales taxes, but whose online merchants would have had to collect it in the case of out-of-state customers.