If you think the debate about Internet taxes has gone away, think again. Taxing sales made on the Internet – an idea that’s been proposed many times in the past decade or so – is still being deliberated by lawmakers in some states.

The current state of Internet taxation came about when the 1998 Internet Tax Freedom Act was signed into effect “to promote and preserve the commercial, educational, and informational potential of the Internet.” It also prohibits federal, state and local governments from taxing Internet access and assessing “Internet-only” taxes, but it did not exempt sales taxes on Internet-made purchases.

Similar to phone and mail-order purchases, when customers make online purchases in states where the selling company has a physical presence, they must pay their local sales tax. Some states require consumers to report online purchases when filing taxes and to pay the sales tax if the retailer does not collect it, but many consumers are either unaware of this requirement or simply fail to include their online purchases on their state tax forms.

Bricks-and-mortar businesses have contended that the lack of tax on Internet sales gives online retailers an unfair advantage – and in today’s price-conscious economic state, that advantage is getting bigger. With state governments facing drastic budgets nationwide, it’s not surprising that they are turning to any source of potential income they can find. This fall, voters in Nevada will once again be asked to vote on a measure that would make it easier for the state to collect taxes on Internet purchases, even though it has been voted down numerous times before. Likewise, Idaho is debating collecting Internet taxes as a way to boost money for its public school system.

The idea of Internet taxation is also rearing its head in Congress. In July, U.S. Representative William Delahunt of Massachusetts introduced H.R. 5660, known as the Main Street Fairness Act, which would allow states to collect taxes on all Internet purchases. The bill is now in committee and awaits a hearing.

Supporters of the bill believe it would create a fair and competitive business environment, while opponents believe it’s simply a tax increase for American consumers. And various technology groups claim that instead of helping Main Street brick and mortar small businesses, the act will instead be a burden to small businesses that sell products and services online.

With online sales still growing, you can be sure the issue is not going away anytime soon.  If your business sells products and services online, you need to keep on top of what’s going on in your state.

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