Tax-free online shopping must end

Would you rather save $50 when you buy that HDTV from an online retailer or watch your house burn down because the nearest firehouse closed? Maybe you’d prefer to see your kid sit in an overcrowded classroom with 40 other students? That’s not a hypothetical question. Every year, the tax-free status of Internet retailers costs state, county, and city governments at least $11 billion, a budget-busting sum that has contributed to the layoffs of thousands of public employees over the past few years.

The free ride, though, may be coming to an end. Legislation to plug the huge loophole passed a critical test in the Senate this week, moving to the floor on a 74-20 vote. That’s right — just under three-quarters of a body that can hardly name a post office without somebody launching a filibuster is willing to take up this topic.

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The Marketplace Fairness Act, as it’s called, would allow state and local governments to require large Internet retailers and other “remote sellers” with annual sales exceeding $1 million to collect sales taxes and send the revenue to the appropriate location.

It’s not just those governments that will win if this passes. Brick-and-mortar retailers, the kind of businesses that actually hire people in your community, will no longer have to charge at least 5 to 10 percent more (depending on the sales tax where they do business) than online giants like eBay, Overstock, and in 41 states, Amazon. Talk about an uneven playing field.

What’s more, retailers are being reduced to showrooms for online stores, where people come in to get their hands on a product, see if they like it, then leave and buy it online for less.

No one enjoys paying taxes or spending more for items they really want. But the Markeplace Fairness Act really is fair, and the days of tax-free commerce on the Internet should be long gone. And despite claims to the contrary,  the technology already exists that will make it relatively painless for mid-sized Web businesses to collect sales tax.

A tax-free ride for 21 years Back in 1992, the U.S. Supreme Court ruled that states could not order retailers that don’t have a physical presence in the state to collect sales tax. At the time, that really meant mail-order catalog merchants, a big business in those days, but by extension, it has applied to Web retailers as well.

Fighting ensued over the meaning of that ruling, and skirmishes between local governments and Web merchants have been something of a full employment act for lawyers and lobbyists. Big bucks from companies like Amazon on one side and brick-and-mortar types like Best Buy on the other side have flowed to Washington and many state capitals. It’s not accurate to see this fight as big business versus small business.

The real issue is the integration of the rising digital economy with the traditional economy. By exempting digital merchants from the duty to charge and collect sales tax, the government is, in effect, giving one sector of the economy a huge subsidy it no longer needs. What’s fair about that?

As you’ve likely heard more than once, the subject of taxes has become a third rail in American politics, so it’s not surprising that the proponents of the Marketplace Fairness Act say it’s not a new tax. Technically, they’re right. Many states have regulations on the books taxing sales by out-of-state retailers, but don’t force them to collect the tax, because they can’t. Instead, the buyer is supposed to declare it at the end of the year.

That, of course, almost never happens; in fact, hardly anyone even knows they’re supposed to do so. For most of us, it is a new tax, and pretending that it isn’t simply begs the question of fairness and ignores the fact it will take money out of the pockets of ordinary shoppers.

eBay leads the opposition — with lies You may have read that Amazon has dropped its long-standing opposition to the Marketplace Fairness Act, which under various guises has been floating around the Capitol for years. Understanding why isn’t hard.

Amazon is decentralizing parts of its infrastructure in order to speed deliveries to consumers. Doing that means building distribution centers around the country, which by definition gives it the “physical presence” that allows states to compel it to collect sales tax. Indeed, the giant Web merchant is already collecting sales tax in a number of states, including California.

However, another Web giant is now carrying the ball: eBay. Over the weekend (as reported in the New York Times) eBay CEO John Donahoe sent an email to millions of eBay sellers urging them to ask Congress to kill the bill: “This legislation treats you and big multibillion-dollar online retailers such as Amazon exactly the same.”

Baloney — as Donahoe surely knows, the bill carefully exempts businesses with less than $1 million in out-of-state sales, a threshold that covers the vast majority of merchants on eBay. It’s also important to note that states will not be required to impose that tax; if voters really hate the idea, they can lean on their legislatures to leave things as they are.

Donahoe also tries to scare merchants whose businesses bring in more than the $1 million sales threshold, saying “Are you prepared to collect sales taxes in the more than 9,600 tax jurisdictions across the U.S.?” More baloney. Amazon already collects taxes in a number of states, all of which have huge numbers of taxing entities within them. There are also third parties, including Avalara and TaxCloud, that have the technology to make sales-tax transactions transparent.

When the debate flared a few years ago Reed Hastings, the chief executive of Netflix, said, “We collect and provide to each of the states the correct sales tax. There are vendors that specialize in this (we use Vertex). It’s not very hard.”

Meanwhile, the loss of revenue is staggering, though the exact hit to the bottom line is impossible to measure. The best, or at least the most widely quoted, estimate is one made by researchers at the University of Tennessee in 2009, which puts the likely loss in 2012 at $11.4 billion. While that’s a huge amount of money, it covers only one year. The researchers estimate that the aggregate loss to state and local governments between to 2006 and 2012 would total $52 billion.

Other estimates quoted by proponents of the Fairness Act put the annual loss of revenue at $22 million, according to the National Conference of State Legislatures. In either case, local governments simply can’t afford to bleed that much revenue.

Given the bipartisan support in the Senate, the Fairness Act seems likely to win approval in that chamber and President Obama says he will sign it if the bill is passed by the House of Representatives. Although the Republican majority of the House is notoriously anti-tax, they are subject to pressure from the many local businesses and chambers of commerce that support the bill.

Sure, your purchases will cost a bit more if you have to pay tax on Internet sales. But is that relatively small savings worth the damage to your state and local governments? It’s your services that will continue to be cut, and your neighbors (if not you) who will lose their jobs.

I welcome your comments, tips, and suggestions. Post them here (Add a comment) so that all our readers can share them, or reach me at bill@billsnyder.biz. Follow me on Twitter at BSnyderSF.

This article, “Tax-free online shopping must end,” was originally published by InfoWorld.com. Read more of Bill Snyder’s Tech’s Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.