The So-Called 'Internet Sales Tax' Explained

April 25, 2013 -- That 1990s Super Nintendo System you've been eying on eBay for $79.97 might soon include an extra fee for sales tax, thanks to a bill up for consideration in the Senate this week.

Senators are wrapping up discussions about the Marketplace Fairness Act, better known by its nickname, the Internet Sales Tax. A vote to advance the bill is expected Friday morning.

The proposed legislation would force many online retailers to begin collecting taxes on their wares in all states, not just where they have offices.

Any online store that makes more than $1 million annually in online sales would have to send taxes back to the states where their goods are delivered, based on the rates required in those jurisdictions.

In a time when states and towns are struggling to make ends meet, this bill would mean extra revenue to make up for federal dollars lost to sequester cuts. It's no wonder some lawmakers are looking to cash in on what has become a sizeable chunk of American commerce.

Revenue from purchases made on the Internet in the United States has grown steadily since 2003. That year, they made up about 1.6 percent of total retail sales in the U.S. By 2012 they had risen more than three-fold to 5.2 percent, bringing in $225.5 billion.

The bill can find support on the right despite many Republicans' pledges not to raise taxes, because it does not subject any new items to taxation. Online buyers legally should be paying these fees already, but they rarely do. There is even a section in the bill called "No New Taxes," that explains this.

Some big name retailers, like Amazon, have come out in favor of the bill.

But opponents say the act would impose a burdensome system on small businesses that don't have the administrative resources to keep such complex books. Retailers would have to determine how much to pay in taxes on an item based on the thousands of tax jurisdictions in the United States.

As an example of how that could get complicated, five states do not have state-wide sales tax, but two of those states – Montana and Alaska – allow localities to charge a sales tax. So a business owner in New Hampshire – which has no sales tax – sending a fishing pole to a customer in Juneau, Alaska, would have to collect a 5 percent sales tax, but would charge no sales tax to the buyer in Denali Borough.

Althea Erickson, director of public policy for Etsy, an online marketplace where crafters can sell their creative goods, wrote an op-ed this week urging lawmakers to raise the revenue rate that differentiates between small and big businesses in the act.

"If you're thinking, '$1 million, phew, that excludes me,' that's understandable," Erickson wrote of the threshold for businesses affected by the bill. "$1 million in sales, however, is well below other federal definitions of small business. And the top 500 largest internet retailers make up 93 percent of lost state revenues. A lower exception hurts small businesses more than it helps states."