Internet Sales Tax Collection and Small Businesses

When my college roommate asked me to be her maid-of-honor I was thrilled. But with bridesmaids spread across three different states it was impossible to gather everyone together for a fitting. Instead, we used an online boutique to purchase the beautiful lace dresses we wore for her summer wedding.  The online store — which made bridesmaid dress shopping a dream — began in 2010 and is just one of the 2 million online businesses that would be impacted by the recently proposed Remote Transactions Parity Act (RTPA).

The RTPA is an internet sales tax bill recently introduced in Congress. If passed the bill would require online stores to charge, collect and redistribute sales taxes accurately when a customer purchases from any state. Practically speaking, the RTPA would require the online dress shop to add 6.85 percent sales tax rate to my bridesmaid dress purchase because I lived in Utah, charge Autumn 6 percent sales tax since she lived in Idaho, add 5 percent sales tax to Katie’s dress to cover Wyoming state sales tax and then send the sales taxes back to those three different states!

Keeping track of the 9,998 different tax jurisdictions in the United States with their varying rates, tax holidays and tax thresholds is a heavy burden to place on a small online business.  To offset the burden the RTPA would slowly phase small businesses.  In the first year, online retailers with $10 million or less in gross annual sales are exempt from charging sales tax in the first year.  By the third year, the exemption falls to $1 million or less in gross annual sales.  But by the fourth year, all exceptions are removed and the complete burden of the various sales taxes falls on the business owner.

While the Small Seller Exception does at least give the dress shop a short time to prepare, the exception is only valid for online retailers who do not use an electronic marketplace like eBay or BT Trading Places. This means that Boise Blades, an online business run by entrepreneur Benjamin Simon that sells pocket knives through eBay, would be responsible for collecting and redistributing sales tax from every person who wins one of his online auctions. With the potentially uncollected internet sales tax estimates at a mere $2.67 billion in 2012, and e-commerce only accounting for 7 percent of total retail sales, is this legislation really necessary?

Supporters of the RTPA say that an online sales tax “levels the playing field,” but what it really does is shift the responsibility for paying sales taxes from the customer to the retailer and create a crushing burden on these online start-up companies. Whether they are selling bridesmaid dresses or blades, Congress should be encouraging e-commerce as a budding sector of the U.S. economy.

Stevi Knight is a research associate with the NCPA.

Comments (3)

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  1. Devon Herrick says:

    I don’t like the idea of collecting sales taxes on online sales. However, if Congress chooses to impose sales taxes on Internet sales, it’s only fair to allow the sellers’ respective state to keep the tax. That way, states will have an incentive to compete for Internet stores. Currently, if you purchase goods out of state, you are supposed to report the purchase and forward the tax. That doesn’t make sense either. The (original) purpose of the Commerce Clause was to prevent states from setting up trade barriers or to collect tariffs from goods imported from other states. I think there is a decent argument that requiring sellers to forward a “tariff” to states in the form of sales taxes is a trade barrier that should not be allowed under the Commerce Clause.

  2. Belle Silva says:

    Very good post. I wonder, however, how much states are losing in retail sales tax revenue as many more people sit at their computers instead of going to brick and mortar retail shops. I know a lot of online retailers are now offering “Black Friday” and “Cyber Monday” sales promotions.

    Another area is foreign online sales. I have purchased online from other countries. I have paid added fees to cover import tariffs, but so far no state taxes on those transactions.

  3. Stevi Knight says:

    Thanks so much for your comments. While sales tax is a helpful way for states to generate revenue, Dr. Herrick’s point regarding the purpose of the Commerce Clause is important.

    Ms. Silva, according to an estimate by Jeff Eisenach the total potential uncollected revenue for online state sales tax at $3.9 billion nationwide – or in 2008 < 3/10ths of 1% of state and local tax revenues. See

    Josh, digital products do muddy the waters on this topic even further, you're right. And yes, please feel free to use this post for your blog!

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