Senate Calls for Level Playing Field for Main Street Retailers

March 25, 2013 at 4:37 pm

The Senate signaled support for requiring large Internet merchants to collect state and local sales taxes, just like Main Street retailers must do, voting overwhelmingly in its budget resolution to “allow states to enforce state and local use tax laws.”

Allowing states to do so would not impose new taxes.  State and local sales taxes are already due on any items a consumer buys online that would be taxable if he or she bought it in a local store.  But, as I’ve explained, a 1992 Supreme Court ruling allows Internet and catalog sellers to avoid charging sales tax to a customer if they do not have a “physical presence” in the customer’s state.  In those cases, customers are supposed to pay the taxes directly to their states but, of course, very few do.

The Court’s decision left the door open for Congress to set rules under which states and localities could require even non-physically present merchants to charge sales taxes.  That’s what the Marketplace Fairness Act — which the Senate signaled support for Friday in an amendment to its budget plan — would do.

While the budget plan isn’t legally binding, the fact that the amendment passed on a 75-24 vote suggests that if the actual bill reaches the Senate floor, it will have no trouble attracting the 60 votes needed to overcome a filibuster.

The Marketplace Fairness Act authorizes states and localities to require large Internet, catalog, and other “remote sellers” with nationwide sales over $1 million annually to collect and remit their sales taxes, provided that states both pay for the software that facilitates nationwide sales tax collection and harmonize and simplify state and local sales tax rules to make tax collection easier for retailers.

Legislation along these lines is long overdue.  States’ inability to require large sellers like Amazon and Overstock to charge tax in every state hurts local economies and costs jobs.  Sales taxes typically range from 5 to 10 percent, so local businesses start out at a 5 to 10 percent price disadvantage compared to Internet retailers that don’t collect taxes.

Public services suffer, too.  Each year, about $11 billion in taxes on Internet sales goes uncollected; roughly the same amount is lost from catalog, infomercial, and other remote sales.  That revenue could help support schools and hospitals, pay and equip police, build and repair roads, and provide the many other services that all residents use.  And, as online shopping continues to grow, so will the revenue losses.

Finally, the unequal treatment of online sales shifts more taxes to those who can least afford them.  Even apart from the Internet sales tax issue, poorer families pay a larger share of their income in sales taxes than better-off families do because they have to spend almost everything they earn just to make ends meet. Tax-free Internet shopping compounds the problem:  many low-income families can’t shop online because they don’t own a computer or don’t have high-speed Internet access.

The only comprehensive solution is federal legislation akin to the Marketplace Fairness Act.  Friday’s vote makes clear that the Senate will likely approve the bill relatively soon.  Let’s hope the vote also sends a strong message to the House.

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More About Michael Mazerov

Michael Mazerov

Mazerov joined the Center staff in January, 1998. He is a Senior Fellow with the Center's State Fiscal Project.

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4 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Marl #

    Online retailers stopped fighting the sales tax laws. They’re going to be pushing to make same/next day delivery the norm for Prime instead of two day delivery, which means needing to have warehouses in basically every state, which means having a physical presence (the lack of which is what they’ve used to avoid sales tax in most places up until now).

  2. 2

    Furthermore, if I buy something in another state while on a trip and bring it back home to use, do I have to pay my state’s “use” tax? Not likely, especially if I paid a sales tax when and where I bought it.
    If anything, an internet retailer might be forced to collect and remit “sales” taxes for the jurisdiction where its business is located and the purchase actually occurred. This would be the same situation as if I had driven to an out-of-state retailer to make a purchase to take back home.
    How many people who live near a state border drive into the neighboring state to buy things because they are cheaper there? What would you propose to do about that “retailer disadvantage?”
    The whole idea of making out-of-state retailers collect and remit taxes owed by your state’s residents is totally absurd, and is absolutely protectionist just as are taxes on imported goods.
    Lastly, as in my case as a retailer of specialized dental office management software, my products may not even be available locally, forcing an internet purchase from areas where I do not have a reseller. Someone in a distant state purchasing my products does not “steal” any business from any local merchants since they don’t even offer it for sale. For other products, you also have the internet purchaser generally having to pay shipping costs, thereby offsetting the assumed savings of no sales taxes. For low priced items, in many cases the shipping cost will far exceed the sales taxes.

  3. 3

    In my opinion, forcing internet retailers to collect and remit use taxes to a state where they have no presence or other connection is a totally inappropriate action. Talk about taxation without representation! The burden this would place on internet retailers, which would have to include international ones, to figure out what taxes to collect, track all collections and remit them to the multitude of individual collection agencies, and pay for all the extra accounting work necessary just to track all that would be an unfair tax on people and entities not residents or otherwise “connected” to the states and localities to justify jurisdiction. It is also an attempt to place the burden of collection of these taxes on some other entity than the one that actually owes the taxes. Your article mentioned that “customers are supposed to pay the taxes directly to their states but, of course, very few do.” If states want to charge their citizens a tax merely for using a product or merchandise they acquired somewhere outside the state, then the state should be responsible for enforcing that tax collection from their own citizens. Many do. Florida, for example, has periodically gone after many dentists who have purchased supplies from an out-of-state supplier, audited their books, and demanded “use” tax payments plus penalties and interest. Most states charge sales and use taxes on the cost of an automobile you purchase somewhere else but bring into your resident state to use.

  4. Darren #

    If this is supposed to be “fairness”, let’s not forget that online retailers have the distinct disadvantage of shipping fees, and lack of immediacy that physical stores have. Also, let’s note that adding sales tax to online orders will increase the cost and therefore stunt the growth of the industry. It may even cause it to go into recession which means there would not be 11 billion in taxes collected annually. Lack of sales tax is a big reason people shop online. Maybe we’ll be surprised and online retail will flourish despite the price hike, I doubt it though. While we’re at it we should also not that an online retailer paying taxes in 50 states is time consuming and costly in itself. A company making $1million per year might only be making $300,000 profit. Hardly enough to pay it’s employees plus someone or some system to handle this kind of taxation.

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