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Level the retail playing field

Sales taxes are vital sources of government revenue, and online retailers should not be exempt.

December 11, 2011

It's an increasingly common sight at the mall: shoppers using their smartphones to scan the barcode of an item they like and checking its price online. Some scanning applications go further, letting shoppers buy the item from a competing Web retailer with just a few taps on the screen. The largest online seller,, even offers customers up to $5 off the items they scan in other companies' stores. The brick-and-mortar shops may be able to match their online rivals' discounts, but there's one competitive disadvantage they can't overcome: Many online retailers do not collect sales taxes from customers outside of the state where they are headquartered. It's a problem for local retailers and governments that Congress has shown little interest in solving. But there are reasons to hope that the situation is changing.

Good tax policy requires equal treatment of similarly situated taxpayers. With that in mind, the 45 states that impose sales taxes typically require buyers within their borders to pay it regardless of where they shop. Angelenos who do their Christmas shopping online are still obligated under the law to pay 8.75% of the purchase price to the Franchise Tax Board. But because online retailers that do not have a physical presence in California typically do not collect the tax, many consumers conclude that they can shop at those sites tax free. That gives the likes of Amazon an unfair edge over not just local stores but also over the online outlets of retail chains such as Target and Wal-Mart that do collect sales taxes. It also deprives state and local governments of billions of dollars in revenue.

Web-based retailers aren't scofflaws; they're just taking advantage of a 1992 Supreme Court ruling that said mail-order sellers with no physical presence in a state could not be compelled to collect its sales taxes. Since then, the Internet has transformed commerce, and Web-based services — including, ironically, one offered to retailers by Amazon — have simplified the task of calculating the local taxes owed by shoppers across the country. This year, California joined the growing ranks of states passing laws that try to circumvent the 1992 ruling and require more Web retailers to collect and remit sales taxes. Those laws may not stand up in court, however; ultimately, Congress needs to step in.

The hurdle in Washington has been partly technical. State and local governments impose a range of ever-changing tax rates, and they have conflicting lists of exemptions. Lawmakers aligned with local retailers tried to solve the technical problem by encouraging states to adopt common, simplified sales tax rules, but only two dozen states have done so. The holdouts include California, Texas and several other large states.

Now Congress is considering a new approach that addresses many of the concerns voiced by the holdouts. Bipartisan groups in the House and Senate have introduced bills that would allow states to require Web-based retailers to collect taxes from their residents if the states give the retailers a simplified way to comply — even if they don't join the multi-state "streamlined sales tax" effort. Among other things, states would be required to support software that automatically calculates the charges to impose on shoppers.

States also would have to give up some of the flexibility they now enjoy. Most notably, the simplification mandated by the bills wouldn't let them carve out sales tax exemptions for favored businesses such as movie productions or small farms. That wouldn't bar states from subsidizing those businesses, however; it simply would require them to do so in other, potentially more explicit and measurable ways, such as through credits for local equipment purchases. The Senate bill also would require states to exempt Web businesses from having to comply if they had less than $500,000 in annual sales, while the House bill would give them the discretion to exempt businesses with $100,000 or more in annual sales within their borders.

As the disagreement over the exemption for small sellers indicates, the bills' proponents still have work to do on the details. And although the bipartisan sponsorship of the bills is encouraging, they still face long odds. Some anti-tax groups have demonized the proposals as a tax increase, when in fact they really are just an effort to enforce existing law. The main alternative for states is to conduct more audits of individual taxpayers and force them to pay the back sales taxes they owe, which some states have threatened to do — witness North Carolina's attempt to force Amazon to turn over records of purchases made by state residents, which a federal court blocked on free-speech grounds.

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