Debunking Internet Sales Tax Misconceptions

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After reading various articles published by the mainstream media and listening to a discussion regarding the issue on a popular talk radio show, it is quite clear that there is an abundance of misconceptions about what exactly the proposed Marketplace Fairness Act says. We have listed some of those misconceptions below and attempted to give a little clarity regarding what the proposed law actually means.

Misconception #1 – “The Marketplace Fairness Act imposes a new federal tax on state exports.”
The proposed law does not impose a new federal tax. The law authorizes a state to require out-of-state retailers (i.e., “remote sellers”) to collect the state’s current sales tax on purchases made by an in-state purchaser. Under current law, states can only require retailers that have a physical presence in the state to collect the state’s sales tax.

Misconception #2 – “Citizens of states that don’t currently have a sales tax will have to pay tax on purchases made over the Internet.”
Again, the proposed law is not a new tax and does not require any state to impose a sales tax if the state does not currently have a sales tax. However, the Marketplace Fairness Act will require retailers located in a state without a sales tax to collect other states’ sales taxes when a customer from such a state makes a purchase from the retailer.

Misconception #3 – “Now I am going to have to pay sales tax on items that are not currently taxable.”
The Marketplace Fairness Act does require states to meet certain simplification requirements, such as requiring state and local sales taxes to be remitted on a single return and offering free software that computes the proper sales tax for each sale. However, states will continue to be free to determine which items are subject to tax. For example, many states do not tax groceries and have varying treatments of computer software. Therefore, even though there may be increased simplification as a result of the Marketplace Fairness Act, there will still be varying treatments of different types of products and services.

Misconception #4 – “The Marketplace Fairness Act only addresses Internet sales.”
Quite clearly, the enormous increase in shopping over the Internet in the past decade is the motivation for the Marketplace Fairness Act. However, virtually every article out there describes the law as an Internet sales tax, which is an inaccurate characterization. Despite this article’s title, the Marketplace Fairness Act itself does not even include the word “Internet.” Yes, Internet sales will be the principal types of purchases impacted by the law, but a sale will not have to be made over the Internet in order for sales tax to show up on your bill. For example, a purchaser in Maryland receives a catalog in the mail from a retailer located in another state. The purchaser places an order over the phone from the retailer. If the retailer does not meet the small seller exception, it will likely be required to collect Maryland sales tax if the Marketplace Fairness Act becomes law.

If you have any questions regarding your sales tax collection obligations, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.

About Michael Colavito, Jr.

Michael Colavito, Jr. has written 7 post in this blog.

Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.

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