A large majority of the U.S. Senate spent much of its time last week addressing a real problem. Democrats and Republicans joined in an effort to end gross inequities in applying local and state sales taxes. They pushed forward legislation that would give states the authority to require online retailers to collect sales taxes for purchases made over the Internet.
That mostly isn’t the case now. A 1992 Supreme Court ruling held that online retailers do not have to charge sales taxes to a customer unless they have a “physical presence” in the customer’s state. The result is that online retailers often enjoy a competitive advantage over more traditional stores, the so-called brick-and-mortar variety.
The advantage can be significant. Consider that the typical sales tax ranges from 5 percent to 10 percent. A traditional store finds itself faced with an uphill climb on price and the prospect of losing customers. Many store owners cite the concept of “showrooming” in play, customers coming into their stores to see and feel the product, then heading home to make the purchase online.
No wonder store owners cry foul, and they have been joined by governors, both Democratic and Republican, who view the inequity from another angle. They note the harm to state and local coffers, an estimated $22 billion to $24 billion a year nationwide that could be invested in leading priorities, including education. More, they stress that the world is changing, the U.S. Department of Commerce citing $226 billion in online sales last year, an annual increase of 16 percent.
If nothing else, the current regimen runs counter to effective tax policy. Apply the tax across a broader base, and the rate trends lower. Allow one constituency to escape the tax, and eventually rates for everyone else will be higher. So, see this extension of the sales tax as sound tax reform.
That isn’t to say the move will be a snap. There are complications, especially in states such as Oregon and Montana that do not have a sales tax, their senators loudly resisting the change. Online firms located in these places would have to add wholly new systems. To ease the overall challenge, the legislation exempts retailers with sales of less than $1 million a year. States would be required to provide the software free to retailers for calculating and collecting the sales tax.
Worth noting is that some online retailers already have moved to collect the sales tax. Amazon actually supports the legislation, albeit as it shifts to same-day shipping, its physical presence expanding into new states and thus local and state sales taxes more often applying to its sales.
The point is, online sales are certain to expand. To maintain the reach and capacity of the sales tax requires keeping pace with the changing marketplace, just as it makes sense to apply the sales tax to an increasing number of services. This isn’t about the government acting punitively or overreaching in some way. As things currently stand, the application of the sales tax is unfair. And the inequity is so distinct that many Democrats and Republicans in the usually polarized Senate have come together. They recognize the need to fix a problem.