Yuletpsi Barreto, along with many students who shop online, relies on convenient Internet discounts to buy electronics, textbooks and other college necessities.
But a new proposal in Congress aims to even out the competition between local and online retailers.
As a result, consumers may soon pay sales tax on some online products, regardless of whether or not the retailer has a physical presence in the state – forcing college students, like Barreto, and other consumers to pay more to shop online.
The new proposal, called the Marketplace Fairness Act, would empower states to tax online purchases that are shipped to their states if the companies have sales amounting to $1 million or more per year. Buying a pair of speakers from eBay, an online giant with no physical presence in most states, could soon be taxed under the proposal if it passes.
“I bought my headphones and a lot of other items like my backpack from eBay so I (didn’t) have to pay retail price,” said Barreto, a first-year biology student. “But my interest in eBay will now decrease.”
While local businesses have to pay sales tax to the state, most out-of-state online retailers avoid the tax. The new proposal seeks to change this.
Under current law, states can collect sales taxes when a resident buys something from a company only if the company has a physical presence in the state, said Gonzalo Freixes, the associate dean for the fully employed and executive MBA programs at the UCLA Anderson School of Management. Companies that have local stores, offices or warehouses fall under this provision.
“This is a loophole and (the online sales tax) seeks to remedy that,” Freixes said.
Currently, 45 states in the country collect some sort of sales tax.
Because companies like eBay are marketplaces and do not have a prominent physical presence in most states, they avoid paying sales taxes in those states. Amazon has offices and warehouses in many states, which makes them pay sales tax.
Freixes said the problem with current law is that it is putting in-state retailers at a disadvantage because they have to pay sales tax that an out-of-state retailer may not have to. He said it is best to see the proposal as a leveling field for all businesses instead of a new tax.
California currently has the highest state sales tax in the country, at 7.5 percent. Sales taxes that differ by county or city push that rate up even higher and would also be reflected in the online sales tax.
“The proposal would be bad for consumers in the sense that they would not be able to find the same deals that comes with online shopping,” Freixes said. “It eliminates some incentives to search for good deals online.”
Many students who rely on online retailers for discounted items such as textbooks and clothing said they will be disappointed if it turns out they have to pay more for items they tend to buy online.
Brittany Mina, a second-year physiological science student, said that discounts from online marketplaces make it easier to shop online, but the new online tax would eliminate some of the convenience.
Other students said they understand the need to implement the policy to even out competition in the economy and ensure fairness for local retailers.
Kevin Liu, a third-year mathematics student who said he does not shop online often, said the policy is a good idea for maintaining competition but that he believes consumers will not significantly change their habits.
“The convenience is still there and this factor will make people stay online,” Liu said.
The state is losing out on money under current law, Freixes added. The California State Board of Equalization, the department that collects the state’s sales tax, said the state would be collecting $1.1 billion under the new proposal.
In the past, the United States Supreme Court ruled that because states have different tax codes, it would be too complicated for online retailers to file taxes in multiple states. Frexies said California would need to centralize its tax collection to make it easier for online businesses to file taxes. The process would not be difficult, however, because the Board of Equalization can easily allow tax collection to be done at a central location, Freixes said.
Frexies said the proposal has bipartisan support in Congress and is likely to pass.
The U.S. Senate is scheduled to vote on the proposed tax on Monday.