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Online taxation

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The Senate is on track to pass legislation that could add to the cost and burden of small retailers doing business over the Internet.

The Marketplace Fairness Act would allow states to collect sales taxes from online retailers with more than $1 million a year in sales and then return it to the taxing municipalities. The bill met limited opposition has it sailed through the Senate with a 63-30 vote to end debate and a final vote on passage slated for May 6. If enacted, a small business in New York would have to navigate a bewildering array of state regulations across an estimated 9,600 sales-tax jurisdictions in determining what is or is not taxable.

L. Gordon Crovitz described the complexities of state laws in a Wall Street Journal op-ed piece: “Wisconsin has a 1,400-word regulation on when the sale of an ice-cream cake is taxable. If the ratio of ice-crease layers to cake layers is too high, sales tax has to be collected. Candy bars are taxable in New York, but not in New Jersey. In Texas, large pretzels are tax-exempt baked goods, but small pretzels are taxable snacks. Iowa charges a sales tax on decorative pumpkins but not edible ones.”

To meet objections, the bill will require states to provide free computer software to retailers to help calculate the taxes. States would also have to set up a single tax agency to collect revenue and then distribute it back to individual counties or cities. And who will pay for 50 state bureaucracies created to shuffle around billions of dollars of sales taxes crisscrossing state borders?

Supporters of the legislation say it will create a level playing field by treating online merchants the same as brick-and-mortar retailers who now collect sales taxes. However, under a Supreme Court ruling, sellers are supposed to collect sales taxes now, if they have a physical presence in the state. Otherwise it is up to buyers to declare the taxes owed and pay them directly to the state as New Yorkers are expected to do when filing their income taxes.

The physical presence requirement explains why some large retailers once opposed to Internet taxes are now willing to accept them as online merchants such as Amazon start to establish warehouses and other outlets in a move toward same-day shipping to attract more business.

However, opponents object to the cost of the regulations imposed on small businesses particularly in states with no sales taxes, such as New Hampshire, Delaware, Oregon and Montana, where online retailers will serve as tax collectors for the other 46 states. New Hampshire Sen. Kelly Ayotte said that “whether your state has a sales tax or not, it’s going to put some fairly rigorous and onerous requirements on online businesses to collect taxes for other states.”

There are also concerns the drive to simplify sales tax codes could ultimately leading to a national sales tax.

Any online taxation bill will still have to make it through the House, where there remains a chance to slow it down.

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