Imagine this scenario-You are the owner of a local audio-visual company. A customer comes into your store to look at purchasing new speakers for his audio system. The customer tries out a variety of speakers, takes advantage of the sales staff's expertise regarding attributes of the product and makes a decision to purchase. Then he gets home, goes online and takes the information he gained from your local business to make the purchase from an out-of-state retailer and avoids paying the state and local sales tax.
In recent years, Main Street retailers are seeing this scenario play out more frequently as hometown stores have become local showcases for out-of-state online purchases by customers who believe they get a discount by not paying sales tax. While the hometown brick-and-mortar business collects the sales tax at the time of purchase in a store, the responsibility to submit the tax from online purchases shifts to the Internet customer. The customer is supposed to pay the sales tax when filing his annual state tax return.
Most taxpayers, however, are not aware of this responsibility, and state and local governments do not have the resources to track down people who aren't paying the tax. This puts local businesses at a five to ten percent competitive price disadvantage relative to out-of-state online sellers.
To close this gap and put local retailers on a level playing field with out-of-state online retailers, Congress is considering the Marketplace Fairness Act. The legislation would give states the authority to pass legislation to collect sales tax from out-of- state online and catalog retailers at the time of a transaction-exactly like local retailers are already required to do. The U.S. Senate passed the Marketplace Fairness Act in April. It is awaiting a hearing in the U.S. House Judiciary Committee.
The discrepancy between online and brick-and-mortar businesses concerning collecting sales tax was the result of a 1992 U.S. Supreme Court decision (Quill Corp. v. North Dakota, 504 U.S. 298). The decision left state and local governments unable to adequately enforce their existing sales tax laws on sales by out-of-state catalog and online sellers.
The Court stated, however, that Congress had the constitutional authority to pass legislation overruling its decision. If Congress acts to regulate interstate commerce through the Marketplace Fairness Act, state and local governments could pass legislation to collect state and local taxes already owed on Internet and mail order sales.
"As the Internet creates exciting new marketplaces for customers, it has also put traditional retail outlets at an unfair disadvantage because of outdated tax law," said Miriam Hair, executive director of the Municipal Association. "Today, technology has made keeping track of local tax rates no longer an insurmountable technical, administrative or financial burden. It is no more difficult than calculating real-time shipping costs, a common feature on most websites and online sales marketplaces."