Consumer Federation of California

California consumers soon could be paying more for the products they buy online if a proposed federal law is approved.

Californians already pay sales tax on merchandise purchased from Internet companies that have a presence in the state, such as a warehouse, store or office. But the Marketplace Fairness Act of 2013 would expand that to include businesses that don’t have operations in the Golden State.

Internet retailers have long held an advantage over their brick-and-mortar competitors. Startup costs and costs associated with advertising and overhead are significantly lower for Internet businesses. And when the absence of sales tax is figured in, it equates to significantly lower prices for consumers.

The Marketplace Fairness Act would grant states the authority to compel online and catalog retailers – no matter where they are located – to collect sales tax at the time of a transaction, just as local retailers are required to do.

The sales tax revenue would then be funneled back to the cash-strapped states where the shoppers live.

"Ultimately, this makes sense," said Christopher Thornberg, a founding partner with Beacon Economics in Los Angeles. "What’s outrageous is the fact that these Internet companies haven’t had to collect the same sales tax that the brick-and-mortar stores do. These guys have had a huge advantage because there’s no physical infrastructure. So they don’t have to deal with that and on top of that they don’t have to charge sales tax?"

The Senate voted earlier this month to approve the bill but it still needs to pass the Republican-controlled House to become law. Major online retailers, including eBay and Overstock.com, oppose the measure, but brick-and-mortar chains like Best Buy are firmly behind it.

The measure does include a couple of caveats. Sellers that make $1 million or less in annual sales and have no physical presence in California would be exempt from the requirement. States would also have to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.

One thing is certain: Passage of the legislation would radically alter the retail landscape.

Christian Zayas, general manager for Sam Ash Music in Torrance, said it’s tough to compete with Internet retailers.

"For years we’ve had to match the prices of online companies, and we’ve done that by cutting our profit by what the sales tax would have been," Zayas said. "This would be good for us but bad for the online places."

And ultimately, more costly for consumers.

Online retailer eBay recently listed a new, 64-inch Samsung HD/3D Plasma TV for $2,050 with free shipping. With Los Angeles County’s 9 percent sales tax figured in, that same TV would sell for $2,234.50. San Bernardino County’s 8 percent sales tax would likewise boost the price to $2,214.

"I just bought a TV from the Best Buy store in Duarte, and I wanted to buy it here so the sales tax revenue would stay here," said Sheryl Lefmann, who lives in Duarte and operates a leadership training business. "But that being said, price is important. I always look for the best deal. If I found a deal where I could save a lot of money I might be persuaded to buy it from out of state."

Jamey Wheeler, who co-owns the Fatal Impact clothing store on Ventura Boulevard in Sherman Oaks, said his mom-and-pop business has grappled with Internet competition for years.

"Last week a lady came into the store with a printout from eBay that had something we sell in our store," he said. "She said, ‘Can you meet this price?’ "We told her it was on sale and that it would be close but we’d still have to charge the sales tax. So she said she’d just buy it on eBay from this person in Illinois without paying any sales tax."

Wheeler said some shoppers have come to his store for the sole purpose of comparing prices with online sellers.

"This is common," he said. "We finally had to take the bar codes off our merchandise because otherwise they’d just come in and scan things on their cell phones. Then they figure out where they can get it cheaper. It’s called showrooming."

Matthew Shay, president and CEO of the National Retail Federation, said the Marketplace Fairness Act would level the playing field.

"This is fundamentally about fairness and the need for government to end its discriminatory sales tax policy that disadvantages local, community-based retailers in favor of remote and online sellers," Shay said in a statement. "While local, community-based stores and shops compete for customers on many levels, including service and selection, they cannot compete on sales tax."

Best Buy voiced its support for the bill in a statement on the company’s website.

"This legislation does not represent a new tax, rather it simply helps to ensure fair competition that ultimately benefits consumers and our communities," the statement said. "The current laws were put in place before the Internet or e-commerce even existed. Just as retail has evolved over the years, the tax code needs to evolve to reflect modern patterns in how consumers shop not by creating a new tax but by enforcing the laws already on the books."

Overstock.com, an online discount retailer based in Salt Lake City, opposes the bill. "A year ago the Supreme Court ruled that if a company didn’t have a physical presence in a state and didn’t use the services of the state they should not be forced to become a tax collector for that state," said Jonathan Johnson, executive vice chairman of the company’s board of directors.

Johnson also said it would be a herculean task for Internet retailers to thread their way through the nation’s various tax codes – simplified or not.

"There are over 9,600 taxing jurisdictions in the U.S., with states, counties, cities and burgs," he said. "And if states have conflicting laws in this area, state law preempts federal law. So that means if a state chooses to ignore all of these simplification provisions they can pass laws that would make it more difficult for remote sellers to collect."

Johnson also discounted the notion that Internet sellers have all the advantages.

"I disagree with that," he said. "Every business model has certain advantages and disadvantages. We have to pay shipping … and people can’t try on our clothes."

Jon Coupal, president of the Howard Jarvis Taxpayer Association, said the current laws are fair.

"Purchasing products online is a viable option for consumers," Coupal said. "The argument is that these out-of-state companies are not paying taxes. But let’s say there’s a small firm in Vermont that makes specialty rope for cliff climbers. They have no impact on the schools and public safety or the roads in California, but when their products are shipped, UPS and FedEx pay taxes to California."

The theory behind trying to tax online companies, he said, is taxation without representation.

"We haven’t taken an official position on this, but it seems to be a transparent money grab," Coupal said.

Michael Carney, an economist at Cal Poly Pomona, figures the Marketplace Fairness Act will prompt many shoppers to pull back on their spending.

"Any time you increase costs to consumers you will have a decline in spending," he said. "There will be less online buying. But how much less, I really don’t know."