by Claudia Bruemmer

Since the U.S. government and most states are running short on tax revenue due to the weak economy, proposals to do away with the moratorium on Internet sales tax have been introduced in Congress. A bill currently in the Senate called the Main Street Fairness Act has been proposed to require Internet merchants to charge sales tax on web purchases.

Internet retailers do not have to charge sales tax on purchases if they don’t operate a physical store or warehouse in the state where they operate. Therefore, while Best Buy and Amazon may sell a computer for the same price, it would cost more from Best Buy’s site because sales tax must be charged due to the fact that Best Buy has physical locations in the states where it sells merchandise.

The Internet sales tax bill is sponsored by six Democrats, including Senator Dick Durbin of Illinois and Representative John Conyers Jr. of Michigan. Senator Durbin argues that the original purpose of the moratorium was to help a nascent ecommerce industry to succeed. Now that online retailers like Amazon and Overstock are generating billions, it’s creating an unfair advantage for these companies, argues Durbin.

While Durbin may be right, online ecommerce retailers are going to fight passage of this bill. Tea Party members in the House and Republicans in general oppose it. Republicans have never seen a tax that they like. Neither has the public. But government is hurting, and so we have another attempt to tax Internet purchases.

In California, shopping at Amazon, EBay and Overstock is about to get more expensive. A new state law just went into effect that requires large out-of-state retailers to collect sales tax on purchases made by California residents on the web.

Those opposed to these new laws say they will hurt online retailers and consumers alike, in addition to suppressing online entrepreneurship. They say sales tax collection would hurt small businesses trying to use the Internet to expand their sales.

Companies like Amazon have been fighting the attempt by states to collect sales taxes. When Texas attempted to collect sales taxes from online retailers that have distribution centers in the state, Amazon threatened to pull out. So the bill was vetoed by the governor. In South Carolina, Amazon got an exemption from a new law by using the same tactics. In Tennessee, Amazon also stopped a proposed law by threatening to move their facilities elsewhere. When the new Internet sales tax went into effect in California, Amazon stopped serving its affiliates located in the state, causing some affiliates to move out of state. Big retailers are playing hardball, and it remains to be seen how the states will fare on the Internet sales tax issue.

Brick-and-mortar companies are putting pressure on those against taxing online retailers because they claim the web merchants have an unfair advantage. They claim it’s only fair that online companies pay their share, putting everyone on the same playing field.

Because of a 1992 U.S. Supreme Court ruling, states aren’t allowed to collect sales tax from retailers that don’t have a physical presence within their state. The states that do collect sales tax on web purchases require individual consumers to keep track of their online purchases and pay sales tax when they file income taxes; however, few people do. Currently, 18 of the 25 largest Internet retailers already collect sales tax in at least 30 states because they have a physical presence in those states.

A group of state officials has been trying to get states to sign the Streamlined Sales and Use Tax Agreement, an effort to simplify sales tax collection across the U.S. The Supreme Court, in its 1992 decision, gave Congress the authority to collect sales taxes on out-of-state retailers if states agree to a simplified sales tax plan. Twenty-four states have signed the streamlined sales tax agreement so far.

According to Durbin, “states will lose an estimated US$24 billion in 2012 because of uncollected sales taxes from Internet and catalog sales.” The bill in Congress would help state and local governments struggling with budget problems. “This will help our state and local governments avoid devastating layoffs and cuts to essential services vital to the well-being of our local communities,” said Representative Conyers, a sponsor of the bill.

Supporters of the Internet sales tax system say that software can automate the process of collecting the tax from multiple jurisdictions. However, non-supporters say that software would be merely a fraction of the cost small online businesses would incur if they had to collect sales tax. Other costs would include staff training, dealing with returns and exchanges, and dealing with sales tax audits.