A bill allowing states to tax online purchases passed the Senate this week in a 69 to 27 vote and will now move to the House of Representatives for final consideration.
Under current regulations, sales tax is not added to online purchases unless the business physically exists in the buyer’s home state. While most citizens are not required to directly pay sales tax on these purchases, they are technically required to complete a “use tax” addendum — citing any online purchases made during the year, including approximate sales tax value — when filing their annual tax return.
According to its supporters, the proposed legislation, entitled the “Marketplace Fairness Act,” is not truly a new form of taxation but rather an enforcement of an already existing regulation, since it guarantees the collection of money already owed.
The proposed plan would require businesses with sales in excess of $1 million annually to tax any online transaction based on the tax percentage in the purchaser’s area of residence. The funds raised by the bill would then be distributed to the corresponding location.
For Californians, this could represent an increase in the funds available for projects in the public sector, including funding for K-12 and post-secondary public education. According to Ted Anagnoson, a visiting professor in the Department of Political Science, an increase in the collection of online sales tax in California may result in a small increase in funding allocated to the UC.
“The University of California would at best get a small portion of the revenue. If we’re talking about a billion dollars [in tax revenue], then that might mean $100 million for the UC,” Anagnoson said.
Though a relatively small amount, this revenue would remain stable over multiple years. Collection of this tax would not terminate after any stated amount of time, unlike tax revenue generated through the recent passage of Proposition 30, an educational funding initiative set to expire in 2017.
While only recently proposed on a national level, the implementation of such a policy on a state level has been attempted multiple times. One instance was the conflict between online retailer Amazon and the California legislature in 2011, in which the state attempted to compel Amazon to collect a sales tax for online purchases made within the state.
Eventually a compromise was reached when the online corporation agreed to establish a physical presence within California, therefore becoming legally obliged to collect a sales tax. Similar incidents have resulted in increased pressure on the federal government to intercede by implementing a uniform online sales tax policy.
While the majority of states have sales tax regulations, the percentage paid often differs between specific locations within a state. Within California, the current state sales tax is set at 7.5 percent. However, certain locations have elected to charge a higher percentage. One such city is San Francisco, which has a sales tax of 8.75 percent. Because of this, online retailers would have to adjust and calculate sales tax rates for many different municipalities. Additionally there are five states — Alaska, Delaware, Montana, New Hampshire and Oregon — which have no statewide sales tax. In these cases, citizens residing within a tax-free state would be exempt from paying sales tax for an online purchase. However, goods exported from one of these five states to a resident in a state with a sales tax would be subject to taxation.
Though the Marketplace Fairness Act passed the Senate this past week with relative ease, this may be attributed to the majority status of the members of the Democratic Party within the Senate, many of whom are more favorable of the new tax legislation than their Republican counterparts. As the bill moves on to the House of Representatives, which is currently held by a Republican majority, it will likely face stronger opposition than in the Senate.