Policy Points: Simple Tax Change Will End Online Retailer Favoritism

By Jeff Milchen

Put executives from large chain retailers together in a room with independent store owners and they're unlikely to find much common ground on government business policy.  But there's one issue they'll surely agree on: current tax policy gives Amazon and other online megastores an unfair, anti-competitive advantage. Representatives of both independents and chains agree a long-overdue update to tax laws will fix the problem and create a level playing field.

From sole-proprietorships to Walmart, storefront businesses in 45 states are required to collect state taxes on retail sales, ranging from about 3 percent to more than 7 percent. In most localities, local and/or county taxes are added to the state's take, yielding a total tax averaging more than 7 percent and exceeding 11 percent in some locations.

Meanwhile, online retailers are exempted from the responsibility of collecting sales tax when selling across state lines. The exemption was created by a U.S. Supreme Court ruling issued in 1992--before online retailing existed.

In Quill Inc. vs. North Dakota, the Justices ruled Congress' constitutional authority over interstate commerce precludes states from taxing sales by companies lacking a physical presence in the state unless Congress authorizes the practice. Admittedly, when Quill was decided, complying with the nation's 6,000-plus sales tax jurisdictions would have posed a major headache and expense for catalog merchants. Today however, simple computer software calculates tax based the zip code of each sale, and businesses need only remit the proceeds to the state periodically.

While some argued subsidizing internet sales was justified to nurture the online sales industry in its infancy, that clearly no longer is needed. The last remaining argument by those hoping to perpetuate their tax-free ride is that sales taxes pay for services out-of-state companies don't use, but the contention doesn't pass scrutiny. After all, Buy.com can't very well deliver your purchase without the same publicly-funded roads and services that let us drive or bike to a store safely.

Of course, most customers would prefer to avoid paying sales tax, but exempting one class of sales is really just a tax shift. Unless local and state governments cut back on spending to offset the growing tax revenue losses, they must increase other tax rates to compensate. Few people are ready to accept cuts in funding for schools, police protection and the other services often funded by sales tax proceeds.

Harm to storefront merchants and communities

As co-director of the American Independent Business Alliance, I work regularly with retailers who report that customers use their shop as a showroom to investigate merchandise, which they say they plan to purchase online—often identifying added sales tax as a decisive factor. The practice is so pervasive that “showrooming” is now a commonplace term and a top concern among retailers.

A recent national survey by the Institute for Local Self Reliance (ILSR) revealed more than 80 percent of independent retailers are impacted by the practice.

The natural market advantages of brick and mortar stores may offset the price differential created by sales taxes when it comes to groceries and other immediate needs. But for stores selling cameras, clothing, consumer electronics, sporting goods, office products and other items, the tax handicap can be lethal.

While both chains and independents are impacted, the loss to communities is especially harmful when local entrepreneurs close up shop. Studies by Civic Economics and ILSR have shown independents' sales typically generate at least three times more local economic benefit per dollar than sales at chain outlets—and almost no part of online sales creates jobs or benefits in the buyer's community.

Each time we buy locally-available products in our own community instead of importing from afar, we're supporting jobs and wealth-creation at home.

Those who care about economic fairness also should note that exempting online purchases from sales tax makes an already-regressive tax even more regressive, since poor people often lack credit cards and secure daytime delivery options—two essentials for buying online.

The inefficiency and regressive nature of sales taxes make a case for state and local governments to curtail reliance on them or replace them entirely, but as long as sales taxes exist, we should demand they're applied fairly.

The year for change

It's time we demand an end to the destructive sales tax exemption that favors online megastores at the expense of other businesses and our communities. Thankfully, a groundswell of bipartisan support means reform could occur this year.

On February 14, a broad, bipartisan group of 53 co-sponsors introduced the Marketplace Fairness Act into both chambers of  Congress, which, in accordance with the Supreme Court's decree, permits states to enforce their own laws so long as they are simplified to make compliance easy. To avoid burdening small businesses for which multi-state filings could be daunting, only businesses with more than $1 million in annual online sales would be required to collect tax on interstate sales. Action on the identical Senate and House bills is likely during March.

Momentum for internet sales tax reform is building across the political spectrum and those of us who care about fair competition and support vital communities should push it to fruition. Let's act before thousands more otherwise viable retailers in our communities are forced to shut down and we're left with fewer options.

Jeff Milchen co-directs the American Independent Business Alliance, which helps independent businesses and communities develop programs that enable community-based business to compete successfully against chains and online giants. See Milchen's articleSeven Ways Businesses and Communities Can Fight "Showrooming," for ideas on countering that challenge.

Policy Points is produced by the American Sustainable Business Council. The editor is Richard Eidlin, Director – Public Policy and Business Engagement.

[image credit: 401k 2013: Flickr cc]