Under a Supreme Court ruling, known as the “Quill” decision, retailers are only required to collect online sales tax in states where they also have a physical store. Consumers are required to report any sales taxes owed for online purchases, thus placing the burden of reporting sales tax on the consumer. States see this as lost revenue, and are looking for ways to streamline the collection of sales tax for their state.

Marketplace Equity Act

Representative Steve Womack, a Republican from Arkansas, and Representative Jackie Speier, a Democrat from California, introduced the Marketplace Equity Act (HR 3179) in the House of Representatives on October 12, 2011. This bill would require states to create a single tax rate that would be simple for online retailers to calculate. States would also have to publish a public notice six months prior to its enactment, detailing how to comply and which businesses would be exempt.

Main Street Fairness Act

On July 29, 2011, The Main Street Fairness Act was introduced to Congress by Senator Dick Durbin, a Democrat from Illinois. The bill would certify the Streamlined Sales and Use Tax Agreement (SSUTA), and give states authority to mandate sales tax collection for online purchases.Both bills are supported by the Retail Industry Leaders Association.

Online Sales Tax Revenue

As states struggle to meet their financial obligations, more and more are looking at online sales revenue as a legitimate source of income. If you go by the 2010 census data, then $170 billion worth of items were purchased online. At an average tax rate of 6.8%, that would add $11.56 billion in sales tax dollars. Money the states desperately want to collect.

California Tax Law

In California, Governor Jerry Brown signed a law that requires large online retailers to begin collecting sales tax from state residents next year. The new law supersedes an earlier measure that would have required online retailers to immediately begin collecting sales tax from state residents. This earlier law prompted Amazon to cut ties with its affiliate marketers in California, thus outraging the affiliate marketing community.After negotiations, Amazon agreed to build distribution centers in California and create at least 10,000 new full-time jobs and hire 25,000 seasonal workers by the end of 2015. In turn, the Governor agreed to delay the collection of sales tax for one year.

Tax Reporting

It’ll be interesting to follow the two bills before Congress now. Already there are companies taking advantage of the tax reporting burden. Companies like Avalara, who offer tax reporting systems, are rushing to integrate their services with e-commerce platforms like Magento.Online retailers are not opposed to collecting sales tax from their online customers, but there needs to be an easy way of collecting and reporting such taxes.

Origin-Based Taxation

A recent paper written by Veronique de Rugy and Adam Thierer for the Mercatus Center of George Mason University, entitled "The Internet, Sales Taxes & Tax Competition," discusses an origin based tax system.

An origin-based system would do away with the need for prohibitively complex multistate collection arrangements such as the SSUTA because states would tax transactions at the source, not at the final point of consumption.

What's Next?

Clearly the debate on Internet taxation is not over. States will continue to push the issue of sales tax for online purchases until they feel their state is receiving its fair share of tax revenue.