Seven or eight years ago, Sarah Pitkin, owner of Pitkin’s Hardware in Dale City, began seeing a shift in customers’ shopping habits. They were increasingly coming into the store to peruse large appliances and kitchen gadgets without any intention of purchasing them there.
“A lot of people see that 5 percent sales tax and decide to shop online instead,” she said. “They’ll come in to see what kind of deal you can give them, but that’s about it.”
But tax-free online shopping may soon be coming to an end. Two bills currently in Congress — the Marketplace Equity Act, introduced in the House in October, and the Marketplace Fairness Act, introduced in the Senate in November — would allow states to collect sales tax on items that are sold online, as well as through catalogues and infomercials.
Supporters say momentum is growing to pass a measure, possibly by the end of the year. The move, which has bipartisan support, could amount to more than $800 million in extra tax revenue for the District, Maryland and Virginia, according to local analysts and trade groups.
“The current system is broken,” said Jason Brewer, a vice president at the Retail Industry Leaders Association. “The loopholes need to be closed, and we absolutely believe that a level playing field will benefit local retailers and state governments.”
A University of Tennessee study estimates that the District would gain $72.5 million in unpaid sales taxes. Maryland is projected to add an extra $375.9 million in tax revenue, while Virginia could see gains of $422.6 million.
“It would be a great thing for the D.C. metro area — especially given the demographic of 20-somethings who do a lot of their shopping online,” said Kim Rueben, a senior fellow at the Urban Institute in Washington. “That’s a lot of tax revenue that D.C. isn’t currently getting.”
Opponents, however, say such measures would not end up making much of a difference for the local economy. All but two of the top 25 Internet retailers, including WalMart.com and Netflix, already collect sales tax in the District, according to Steve DelBianco, executive director of NetChoice, a trade group of online businesses and consumers.
“If brick-and-mortar stores think they’ll suddenly be competing with Amazon or Wal-Mart.com, they’re going to be sorely disappointed,” DelBianco said. “Consumers don’t shop online to save on sales tax — they do it for value, convenience and choice.”
DelBianco added that online retailers will be further hurt by the amount of time and money they’ll have to spend upgrading their computer systems, juggling more than 1,000 different local sales tax rates and filing quarterly taxes in states throughout the country.
Under the Marketplace Equity Act, online vendors with remote sales of less than $1 million overall, or less than $100,000 in a specific state, would be exempt from collecting sales taxes. The Marketplace Fairness Act, by comparison, would exempt business with remote sales of less than $500,000.
“It’s not a matter of really, really small businesses collecting taxes in every state,” said Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities in Washington. “It’s for the billion-dollar companies of the world — the Amazons and Overstocks — to play fair.”
Amazon.com has come out in support of the Marketplace Fairness Act, but has made it clear it would like to see stronger exemptions for small businesses.
“Congress should enact [The Marketplace Fairness Act] to protect the states’ rights, address the states’ fiscal needs, and level the playing field for all sellers,” Paul Misener, a vice president at Amazon.com, said during a Senate committee hearing last week.
The two acts differ in their prescriptions for tax collection, as well. The House bill would give states three options for the amount of sales tax they could collect on online purchases. States could either charge all residents the maximum sales tax within the state; create a “blended” figure that takes existing tax rates of all jurisdictions into account; or tax residents based on the sales tax rate in their given jurisdiction.
The Marketplace Fairness Act in the Senate would limit states to the last option, which supporters say ensures that residents do not end up having to pay a higher sales tax rate than their city or county charges. Opponents of the policy say it would require states to unnecessarily juggle dozens of different sales tax figures on online orders.
Neither bill would impose a new tax per se; all 50 states and the District already require residents to calculate and submit unpaid sales taxes with their income tax forms every year, Mazerov said, adding that the vast majority of people do not report such taxes.
“Although not legal, it’s become a de facto tax exemption,” Mazerov said. “This would just compel the seller to collect an Internet sales tax at the time of a transaction.”
The bills seek to address a Supreme Court ruling from 1992 that prohibits states from taxing sellers that do not have physical facilities in that state.
“Nowadays people don’t think twice about buying something online,” said Eileen McGervey, who owns One More Page Books in Arlington. “We don’t need to give [Web stores] a special pass anymore.”