Internet sales tax: What you need to know

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by Chris Patterson

NEW YORK (CNNMoney) -- Many online purchases could soon be more expensive, if a long-debated Internet sales tax law advances through Congress.

The law would allow 45 states and the District of Columbia to demand that online retailers collect sales tax on purchases. Estimates are that consumers would be spending between $12 billion to $23 billion more a year due to the increased tax collection.

Here's what you need to know about the current law on online purchase and what would happen under the legislation:

When is an Internet retailer required to collect sales tax under current law?

Essentially states can only demand that online retailers that have a physical presence in their states -- such as a store, a warehouse or a factory -- collect sales taxes on purchases by residents of that state. Technically people who buy goods online tax free are supposed to make sales tax payments on those purchases to their home state. But estimates are that only about 1% of buyers comply with those widely unenforced laws.

Who would pay sales tax under the proposed legislation?

Sellers with more than $1 million a year in sales would be responsible for collecting the tax from buyers in the 45 states plus D.C. that currently charge sales tax. Even if an online retailer provides "tax-free" purchases as a way of attracting customers, the way many now offer free shipping, it would be responsible for paying the sales taxes to the various states. That would likely raise the cost of the item charged consumers.

How much in taxes will be paid?

This is tough to say. The most widely quoted study shows that there would be $12 billion in taxes, but that study is from 2009 and online purchases have risen significantly since then. Some estimates are that tax collection could be nearly double that amount. The highest statewide sales tax is the 7.5% rate in California, but local sales taxes raise the rate to about 10% in some locations.

Who is supporting the legislation?

The National Retail Federation is one of the most active voices in support of the proposal, as it is concerned its brick-and-mortar members are losing sales to online competitors. Amazon.com, the largest online retailer, is also backing the bill. It is expanding the number of warehouses nationwide, so most Americans already pay sales tax on their Amazon purchases. So Amazon doesn't want a competitive disadvantage with other online retailers that have a smaller geographic footprint.

Who is opposing the proposal?

Many online retailers are opposed, saying it would create an administrative nightmare to comply with the law, and that higher taxes would hurt their sales.

On Sunday, eBay CEO John Donahoe sent an e-mail message to millions of users asking them to contact members of Congress. The e-mails went to eBay members who simply buy online in addition to its millions of sellers. Donahoe advocates a threshold of $10 million in annual sales or 50 employees before an online retailer would have to start collecting sales taxes.

While Republican advocates of the bill insist that the bill imposes no new taxes and only allows collection of existing ones, anti-tax activist Grover Norquist of Americans for Tax Reform wrote to senators Monday urging them to vote against the bill.

What is the status of the legislation?

The legislation has strong bipartisan support, with the lead sponsors in both houses being Republicans. But it has never been able to get out of committee for a vote on the floor of either chamber before now. Democrat Max Baucus, the chairman of the Senate Finance Committee, has kept the legislation from advancing. Baucus is from Montana, one of the five states without a sales tax.

Senate Majority Leader Harry Reid took the unusual step of bypassing the Finance panel for a Monday procedural vote that passed with 48 Democrats and 26 Republicans in support. The legislation could be in its final form later this week, though a vote might not come until after the coming recess.

Passage in the House is less certain. but the measure does have bipartisan support there as well. Norton Francis, senior research associate of the Urban-Brookings Tax Policy Institute, said that even members of the House Republican leadership support the plan.

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