NCPA - National Center for Policy Analysis

How Would the Internet Sales Tax Hurt New Businesses?

October 13, 2014

Julie Borowski, policy analyst at Freedomworks, reports that lawmakers are pushing to enact the Marketplace Fairness Act after the November midterm elections. The bill would require online retailers to collect sales taxes, a burden that would disproportionately impact small retailers, says Borowski. 

Currently, consumers are not required to pay sales taxes on online purchases unless the online retailer has a presence in the consumer's state. The Marketplace Fairness Act would change this reality, allowing states to require retailers to collect sales taxes.

But there are 10,000 different sales tax jurisdictions in the United States, explains Borowski, meaning that online retailers would have to comply with all of these jurisdictions based on the consumer's location. In Texas alone, there are 1,500 different tax jurisdictions. The jurisdictions vary not only in the amount of tax that they impose, but on the items which are subject to taxes. For example:

  • Eight states do not tax clothing, or have partial exemptions for sales of clothes.
  • Pennsylvania does not tax clothes unless the clothes are considered formal wear, bathing suits or fur coats.
  • Some states tax clothing only above a certain dollar figure.

Clothes are not the only item subject to diverse tax treatment. Borowski provides another Pennsylvania example: the state taxes contact lens cleaning solution but exempts contact lens wetting solution. These types of exemptions are found across the 45 states that impose sales taxes. 

This complexity would burden retailers. According to the True Simplification of Taxation Coalition, setting up this taxing regime would cost businesses between $80,000 and $290,000 to set up, plus annual fees and auditing costs from $57,500 to $260,000. 

If the online sales tax is burdensome, why does it have retailer support? Borowski notes that large retailers such as Amazon have come out in favor of the sales tax proposal, alleging that large retailers can easily afford the compliance costs which could put smaller competitors out of business. 

Source: Julie Borowski, "Here's how the Internet sales tax bill would crush entrepreneurs," Rare, October 9, 2014.


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