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What the Internet Sales Tax Means for Small Biz

By Aditi Mukherji, JD | Last updated on

The days of tax-free online shopping may be numbered. The Senate is set to vote on a bill that would give states the power to collect sales tax on all Internet purchases.

If the bill passes, local governments could get up to $11 billion (yes, with a "b") per year in added revenue, The Washington Post reports.

Small businesses need to know about The Marketplace Fairness Act because it could affect the way they do business.

What Is the Marketplace Fairness Act?

The Marketplace Fairness Act would give all states the ability to collect taxes from all out-of-state online vendors that sell goods to their residents, the Post reports.

The bill isn't really a new tax liability because online purchases are already supposed to be taxed. If you live in a state that charges sales tax and buy something online tax-free, you're supposed to calculate the tax yourself and add it to your state tax bill.

Don't worry, no one else actually does it either. That's the gap that the bill is trying to fill.

Here's how the Marketplace Fairness Act could affect small businesses:

The Down Side: Tax Confusion

Since sales tax rules vary from state to state, collecting state and local sales taxes all around the country would require quite a bit of effort for online retailers, NPR reports. This isn't a big deal for big retailers, but it could be pretty burdensome for smaller online retailers.

From the perspective of big retailers like Amazon, the new burden on small businesses is a good thing -- it makes life tougher for smaller, would-be competitors.

The Up Side: Small Business Exemption

To protect small businesses from being overburdened, small businesses which generate less than $1 million in annual revenue will be exempt from collecting interstate sales tax, according to The Inquisitr. Basically, this gives a slight advantage to small startup websites over other higher revenue-generating competitors that would have to charge sales tax.

This isn't the first bill about an Internet sales tax. To weather the recession, nine states -- including New York, California, Pennsylvania and Texas -- have passed so-called "Amazon" taxes that require the online retailer to charge sales tax for customers who live in their states, the Post reports.

Unlike an "Amazon" tax, the pending Marketplace Fairness Act would cover all online retailers.

The bill is expected to pass in the Senate next week before it heads to the House, the Post reports. You can read the bill in its entirety at the Library of Congress' website.

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