Will Mom-and-Pop E-Commerce Shops be Economically Affected if Online Sales Tax Passes?

For more than a decade, federal and state lawmakers have attempted to craft legislation to regulate the collection of sales tax on internet purchases. The Marketplace Fairness Act of 2013 passed the Senate in May with bipartisan support. House bills are now under consideration to achieve the same goals, which are to level the playing field between online retailers and brick-and-mortar competitors, as well as more effectively enforce existing sales tax revenue collection laws. House Judiciary Committee Chairman Bob Goodlatte recently released a list of principles that should form the basis of the House bill, which is also expected to enjoy bipartisan support.

The question of taxation of online sales stems back to 1992, nearly a decade before e-commerce really began to take off, when the U.S. Supreme Court ruled that retailers didn't have to collect and remit local sales taxes unless they have a substantial connection ("nexus"), such as a physical presence, to the state where the customer lives. Where there was no nexus and sellers didn't collect the tax, the Court ruling left it up to customers to pay the taxes owed in the form of "use" taxes, but most consumers don't understand that obligation and very few bother to comply. This created a loophole for the upcoming world of e-commerce.

One of the reasons cited for the 1992 Supreme Court decision was that merchants who sell out of state would potentially have to comply with the tax rules of over 10,000 tax jurisdictions to correctly collect and remit sales taxes. The Court noted that this would be an "undue" burden to place on businesses, that it would too complex and onerous to require a company to track and manage this massive body of rules.

Organizations that oppose the Marketplace Fairness Act and similar legislation cite this same argument today, particularly when it comes to small businesses. They claim it's unreasonable to expect small retailers — mom-and-pop e-commerce shops — to comply with thousands of tax jurisdictions. They reference those very large online retailers with operations in multiple states that do invest hundreds of thousands of dollars in staff and systems to manage revenue collection and reporting.