Should Online Retailers Collect Sales Tax?

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Sales taxes are a fact of life for most Americans and American businesses. Every time someone makes a purchase at a store whose offerings are subject to taxation, that business is required to collect taxes on behalf of the state. When people shop online, however, the rules change. Across the U.S., online retailers collect taxes on some of their sales—but not all. This discrepancy has some arguing for a federal regulation that requires online businesses to collect taxes on everything.

Why Online Retailers Don’t Collect Taxes on Every Sale

A 1992 Supreme Court ruling states that an online retailer only needs to collect sales taxes for a state if the business has a physical presence in that state, such as an actual storefront, a warehouse, an office, or a sales representative. For example, if a Texas-based business makes online sales in California, but doesn’t have any property in California, it may not have to collect sales taxes from its Californian customers.

However, this system might not last. Some states now require sales taxes from online businesses that do not have physical presences in those states, and there is a national movement to pass a bill, called the Marketplace Fairness Act, that would require online retailers to collect taxes on all their sales throughout the country.

Advantages of Requiring Tax Collection

There are a few fairly straightforward reasons why online retailers should collect sales taxes. First, when they don’t, states miss out on crucial revenue. This collection gap worsens every year as online shopping becomes more popular. Owners of brick-and-mortar businesses also say that this creates an unfair advantage for online businesses. Because sales taxes typically run between 4 and 7 percent, online businesses offer a substantial savings by not collecting taxes.

Finally, this setup pushes more of the sales tax burden onto poorer Americans. Low-income Americans are less likely to have regular Internet access with which to shop online. As a result, they pay more of the total sales taxes at regular businesses while wealthier households enjoy tax-free online shopping.

Disadvantages of Requiring Tax Collection

While the benefits of collecting sales taxes are clear, there are some counterarguments. First, large retailers such as Amazon (which holds property in many states) already collect taxes on most sales. As a result, requiring national collection wouldn’t really affect these businesses. It would, however, affect small-business owners. They would need to register and keep track of taxes for every state in which they make sales, which could be more work than it’s worth. In addition, shipping and handling costs for products sold online knock out any price advantage of not collecting sales taxes.

In addition, some retailers don’t believe it’s fair to have to pay taxes in states where they aren’t physically located. Because they don’t have a physical location, they aren’t benefiting from the government services taxes pay for, such as roads and the fire department.

No matter which direction the country moves, some stores will benefit and others will be hurt. What’s more important is that the government decides soon so business owners are able to predict the taxes on their future online sales and adjust accordingly.