Sen. Dick Durbin of Illinois is planning on introducing the Main Street Fairness Act to the Senate. The bill will pair with H.R. 5660, introduced in July of last year, and require online retailers to pay state sales tax on purchases made on their websites.
Current state of sales tax
In 1992, the Supreme Court Case Quill v. North Dakota set the precedent for how interstate sales are currently handled. Businesses that sell online are required to collect state sales taxes only when they have a nexus of business in a particular state. Generally, a nexus is defined as a physical location. Some states, such as Colorado, have tried defining any business as a nexus, but lawsuits have blocked the implementation of these laws. State and local sales taxes combined have created more than 7,200 individual tax jurisdictions within the 50 states.
The Streamlined Sales Tax Agreement
The Main Street Fairness Act, as introduced in the House and Senate, would provide some protection for businesses trying to comply with the law. The businesses would only be required to pay sales tax in the states that have signed onto the Streamlined Sales Tax Agreement. The Streamlined Sales Tax Agreement is an effort, started in 1999, to simply state tax codes. Only 24 states have signed onto the agreement, and only about half of those states have fully signed on. The intent is to create a more uniform set of tax codes to make it easier for businesses to navigate and pay, no matter where their central business activities are located.
The complexity problem of sales taxes
There is a complexity problem when it comes to the effects sales taxes have on competitiveness. Brick-and-mortar businesses, both large and small, complain that online retailers are able to compete unfairly by being exempt from sales taxes. Retailers such as Amazon.com benefit greatly from this exemption and are fighting against changes that would require sales tax payments in other states. For small retailers, however, this exemption can be helpful because of the increased competitiveness and reduced complexity. Being required to navigate 7,200 different tax statues is very difficult, even for the most savvy small business owner. If the Main Street Fairness Act does pass, it will require anyone who sells online to determine whether their customer lives in one of the SSTA states and what tax is due, then file a quarterly state tax return with that state. It is unclear whether those businesses will also be required to register for and pay for state and local business licenses for every municipality where they make an online sale.
What these laws mean for online stores
If you run any kind of service online, be it SEO consulting or a full-fledged online store, these possible laws could heavily affect your business dealings. Currently, ensuring you are registered as a business where you operate is important, even if you just make a few hundred dollars a year from affiliate ads. If you are selling a physical product, make note of any changes to your state and federal tax law. As always, consult with a tax professional if you are not sure.