It's time to tax online sales
As a matter of fairness, Congress should pass an Internet sales tax bill. But the final bill should fix problems for retailers having to deal with tax codes from multiple jurisdictions.
The Senate on Monday passed the Marketplace Fairness Act on a 69-27 vote, empowering states to collect sales taxes for out-of-state purchases made online. The legislation is expected to face a bigger hurdle in the House. Though flawed, the House should improve the measure and then approve it.
I don't like the idea of state and local governments collecting more tax revenues -- they know no limits to their capacity to squander our hard-earned dollars. But the current situation is unfair, and bad economic policy.
In 1992, the U.S. Supreme Court held that states did not have the power to levy taxes on online sales unless the retailer has a physical presence in their state. Consequently, major online retailers like L.L. Bean routinely collect the appropriate state sales taxes in jurisdictions where they have a store or warehouse but do not on sales in states where they do not have a physical presence.
Main Street retailers complain that this situation puts them at an unfair disadvantage -- and they are absolutely correct. No business would like the government giving a roughly 5% price advantage to out-of-state competitors.
Nonetheless, many small retailers erroneously assert that a law requiring Internet retailers to charge sales taxes would buoy their flagging fortunes. It would not. Most local retailers, competing with Internet businesses and big-box stores, lack the scale to offer the variety of products an increasingly diverse American population demands, not to mention the scale to get favorable prices at wholesale.
A boon to Amazon.com
Taxing Internet sales would make this problem worse by consolidating online competitors. The online bookstore in Tuscaloosa, Ala., for instance, is much less menacing to the small bookstore in Boston than Amazon.com (AMZN) is. However, the Senate bill would drive out the Alabama retailer and enlarge giants like Amazon.com.
The Senate bill would require all retailers with more than $1 million dollars in sales to collect and remit sales taxes to every state and local jurisdiction in which it makes a sale. That would require coding each sale by Zip code and remitting to the states the appropriate receipts -- which can vary by state, city and county.
In the end, local vendors would have to rely on software or services comparable to the payroll services that now cut paychecks and remit withholding taxes on income, Social Security and unemployment insurance to state and local governments.
As anyone owning a small business knows, those services are far from perfect. Many have received erroneous assessments and penalties -- owing to mistakes made by payroll services -- and that these issues require considerable time and effort to resolve.
For payroll purposes, small businesses must deal with their home state and a few neighboring jurisdictions, but for the purposes of sales taxes the potential expands to more than 5,000 state, city and county governments. Imagine running a rare-book store in Boston with an online presence and receiving a few hundred erroneous notices of assessment from jurisdictions as far away as Alaska.
Not surprisingly, Amazon.com is in favor of the legislation. It could handle these issues much as Xerox (XRX) handles employee payroll taxes all across the country -- its small competitors could not. Paying sales taxes in all 50 states adds to its costs but the benefits to its bottom line of driving out small competitors easily makes up the difference -- with a big profit.
An imperfect solution
The Senate bill excludes retailers with annual sales less than $1 million but that is a pittance in retailing and bears no parallel to definitions of small business in other federal legislation. For example, local restaurants and other businesses with fewer than 50 employees are exempt from Obama Care mandates to provide employee health insurance, and supporting 50 employees can easily require sales north of $10 million dollars.
Although it is far from a perfect solution, raising the threshold for retailers that must collect sales taxes outside their jurisdiction to $10 million would do a lot to more to preserve small businesses -- including brick and mortar retailers -- than requiring virtually all retailers to comply.
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