The days of the “no sales tax” advantage that online vendors enjoy over brick-and-mortar retailers are numbered. Sort of.

Years of lobbying to find a new method of fair taxation that accommodates the world of digital commerce appear to be gaining traction. But as with most things that involve Congress, the various states and tax reform, predicting when the playing field will become more level is anybody’s guess.

Legislation enabling a state to collect sales and use taxes from vendors not having a physical presence in that state passed the Senate last year. The Marketplace Fairness Act of 2013 now awaits action by the House of Representatives.

Collecting sales taxes from out-of-state vendors for decades was considered too complex and costly to administer. The Supreme Court said as much in decisions in 1967 and 1992, ruling that a vendor only had to collect sales tax if it had a physical presence in the state.

In other words, no office, no warehouse or distribution center means no tax on invoices to residents of that state.

This gave mail order and, eventually, online sellers a clear advantage over resident merchants with the overhead of buildings and staff, who are obligated by law to collect state and local sales taxes. Out-of-state merchants avoided the headaches and expense of calculating, collecting and remitting sales taxes to the states where they sold goods. On larger purchases, consumers could avoid paying sales taxes sometimes amounting to hundreds of dollars.

As any specialty retailer can attest, shoppers are not shy about leveraging the online sales tax advantage when negotiating showroom prices.

Forty-five states require their citizens to pay sales taxes on online purchases, usually as a line item on state income tax forms. Taxes collected through this honor system method have, shall we say, fallen short.

This situation results in momentary taxpayer glee (who doesn’t like to get one over on The Man?) and contributes to fiscal handwringing back in the state capitals. Fewer dollars collected in sales taxes mean fewer dollars to pay for such mundane things as teacher salaries and fire trucks.

The Marketplace Fairness Act addresses the issue of noncompliance by placing the responsibility for collecting sales taxes on vendors. That initially sounds ominous, because there are literally thousands of tax jurisdictions across the nation. Figuring the sales tax on a particular sale and routing it to a specific tax office would be a nightmarish task, a premise with which the Supreme Court agreed in its 1992 decision. The situation then was deemed unmanageable.

Since then, however, computers have become commonplace and more capable. Furthermore, 44 states have worked together to create a system to make it simpler for businesses to collect taxes on Internet transactions and send it where it belongs.

The Streamlined Sales and Use Tax Agreement, an effort of the National Governors Association and National Conference of State Legislators, was launched in 1999. The legislatures of 24 states have endorsed the agreement, which is cited in the Marketplace Fairness Act as the main method of compliance. Endorsement by a state legislature causes a state to make adjustments to its taxation system so that it can mesh with the standards that make the Streamlined Sales Tax possible.

“We’re about simplification and uniformity, to make it as simple as possible for a business to agree to collect tax,” says Craig Johnson, executive director of the Streamlined Sales and Use Tax Governing Board. The organization advocates for adoption of the Streamlined Sales Tax provisions at the state and federal level.

Some 2,100 businesses already have signed up to participate in the program, Johnson says. They are voluntarily collecting sales taxes that are remitted to the states whose legislators have approved the provisions of the Streamlined Sales Tax. Privacy laws prevent disclosing the names of individual businesses. It’s significant, however, that an Amazon.com executive is president of the Streamlined Business Advisory Council.

From October 2005 through December 2012, Johnson says, retailers participating in the Streamlined Sales Tax voluntarily collected nearly $1.3 billion in sales taxes for the states.

Studies indicate that the states lost $23 billion in uncollected sales tax on e-commerce, phone and mail order transactions in 2012.

“It’s a lot of money that’s legally due and owing to the states,” Johnson says. The Streamlined Sales Tax “is a mechanism for the states to be able to collect this tax.”

How Does It Work?

Not every business engaged in e-commerce will be required to collect taxes on out-of-state sales. Businesses that have less than $1 million in annual e-commerce, mail order or telephone sales revenues are exempt.

A business doing $1 million or more in out-of-state sales may choose one of six service providers certified to provide compliance with the Streamlined Sales Tax. There’s no cost to the merchant.

The service provider, Johnson says, provides everything the merchant needs, including software that properly calculates sales taxes based upon the purchaser’s address. The merchant’s computer system each month tallies the taxes on out-of-state sales, and the merchant remits that amount to the service provider.

The service provider then sends the sales taxes to the designated recipients and deducts an administrative fee from that amount (not from the merchant) for managing the process.

If there is a mistake in the service provider’s sales tax database that causes a merchant to collect an incorrect amount of tax, there is no liability to the merchant.

Johnson says that feature “is important to give the retailers certainty when using a certified service provider.

“The states are looking to collect the right amount of tax,” he says. “They don’t want to over-collect.” The certified service providers “are focused on customer service and leveling the playing field between brick-and-mortars and the online retailers. We don’t want shoppers to bring taxes into the discussion with retailers when they are comparing a local vs. online purchase.”

California and New York are among the states whose legislatures have not yet endorsed the Streamlined Sales Tax. Johnson says passage in certain states means first creating a uniform tax base across the state.

Other hurdles include changing a state’s rounding rules to match those in the Streamlined Sales Tax, and rewriting tax rules to make taxes uniform on certain goods whether purchased in state or from an out-of-state vendor.

“We’re doing as much as we can to convince state and local governments to work with the business community and find the best approach for them,” Johnson says.

The Marketplace Fairness Act is not without critics. Among them are The Heritage Foundation and Grover Norquist, president of Americans for Tax Reform. Ron Bonjean, a spokesman for the Marketplace Fairness Coalition, which supports the legislation, discounts warnings of businesses getting socked with hidden expenses and predictions of sales lost because of software glitches.

“This is nothing more than a smoke screen to disguise the fact that some companies are desperate to preserve their government tax advantage over brick-and-mortar retailers,” Ronjean wrote last fall, responding to criticism from NetChoice, an e-commerce trade group that opposes the Marketplace Fairness Act.

Meanwhile, specialty retailers interviewed by Hearth & Home say they are focused more on their daily responsibilities than on how the Marketplace Fairness Act may affect them.

“As a company, we are waiting for a real law to be in place,” says Chad Harris, owner of The Garden Gates in Louisiana. The business has a brick-and-mortar location as well as a thriving online business. “All the things

I’ve seen are ungovernable,” he says. Louisiana has not yet endorsed the Streamlined Sales Tax.

Jack Wills of Jack Wills in Tulsa says he always welcomes competition “as long as it’s fair. But I’ve always felt the ‘no sales tax’ thing is unfair competition.”

Chad Scheinerman of Today’s Patio fully expects adoption of the Marketplace Fairness Act to affect the online side of his business. Today’s Patio, an online sales pioneer, currently operates seven stores in Arizona and California.

“We may lose some revenue on Internet sales, but our local customers who are buying online may shift their business to our brick-and-mortar stores,” he said.

Johnson, of the Streamlined Sales & Use Tax Governing Board, urges business owners in favor of sales tax fairness to contact their state legislators and representatives in Congress, especially those with reservations about the Marketplace Fairness Act. Learn about their concerns, he says, and “really get the dialog going.” Johnson says that without sales tax fairness, “the number of brick-and-mortar retailers that people can shop will go by the wayside.”

The issue seems to have gotten the ear of big business. In early January, hundreds of organizations representing more than three million businesses sent a joint letter to U.S. Representative John Goodlatte of Virginia, chairman of the House Judiciary Committee. The letter urges “immediate action on legislation to create marketplace fairness and make the 2013 holiday shopping season the last where Main Street businesses must compete at a government-created price disadvantage.”

Organizations and businesses listed as supporting the Marketplace Fairness Act include the U.S. Chamber of Commerce, Badcock Home Furniture and the National Home Furnishings Association. For further information – www.streamlinedsalestax.org/.