The online retail giant Amazon benefits from a large loophole in the federal tax code. Because companies only have to collect sales tax in states where they have a physical presence, Amazon is able to avoid collecting the tax in many states, giving it a way to undermine traditional retailers. But a bipartisan group of 57 members of Congress is trying to change the law to close Amazon’s loophole:
Twenty senators and 37 members of the House from both parties signed on to the Marketplace Fairness Act of 2013 (MFA)—legislation that would allow states to collect taxes on what consumers buy over the Internet.
The measure would finally resolve a decades-old dispute over whether states can collect sales taxes on mail-order and online purchases. Currently, states are barred from requiring out-of-state sellers to collect sales taxes, unless the retailers have a physical presence (or nexus) in their jurisdiction. The MFA would allow states to require sellers to collect these levies no matter where the firms are located.
This loophole gives Amazon (and other online shops) a leg up on its competitors for no real reason. As Michael Mazerov wrote for the Center on Budget and Policy Priorities, there is “no excuse for exempting large companies like Amazon and Overstock that are perfectly capable of collecting tax everywhere — just as their brick and mortar competitors do.”
Applying an online sales tax fairly would also make the tax code slightly more progressive, as “many low-income families would love to shop online to avoid sales tax but can’t because they don’t own a computer or can’t afford high-speed Internet access.” Sales taxes are inherently regressive, and exempting online purchases makes them even more so, as those with the right technology get to skip the tax entirely.
States governed by both Democrats and Republicans have moved to address this issue, but it won’t be truly fixed until Congress takes action.