September 1, 2010, 12:00 AM

Publisher's Letter: The great sales tax debate

This is a middle-ground proposal designed to appeal to both sides of the web tax debate

A debate is now simmering in Washington over allowing states to collect and remit sales taxes from customers in other states that participate in what amounts to an e-retail taxing program. Those in favor of this legislation, including the National Retail Federation, argue that taxing e-retail sales creates a level playing field between stores that must collect sales taxes and web sites that do not. Those opposed argue that this is a bad economic time to raise taxes on anybody and taxing sales at web sites would place a heavy burden on hundreds of thousands of small retail web sites and an equally heavy burden on state tax collectors.

Why is the NRF proposing increased sales taxes on its members, all of whom have tax-sheltered retail web sites? It sees stores losing market share to e-retail businesses that have an unfair advantage, and it's using the state budget crises to advance its case. Taxing e-retailers would insure that "state and local governments can collect the sales tax revenue they need to support vital services like police and fire departments, ambulances and schools," said NRF vice president and government and industry relations counsel Maureen Riehl. "There is no reason one group of merchants should be given an unfair price advantage over another."

Riehl's argument ignores the fundamental differences between a bricks-and-mortar store and a web store so far as state and local government services are concerned. Stores put many more burdens on local services than web sites. Stores rely on police to respond to thefts and robberies at their stores, and when stores catch fire, local firefighters respond. Construction of a new store in a community creates work for city planners, zoning officials, traffic managers and may well require new or expanded public roads. None of this applies to web stores.

That's a good reason why the sales tax rates e-retailers are forced to collect should be about half of the average 7% sales tax that stores have to collect. There are other reasons, not the least of which is that retail web businesses are more energy efficient. Loading up a single truck with packages to be shipped to 50 homes in a neighborhood requires less fuel than having those same 50 homes drive separately to stores to buy the same merchandise—products that were trucked to the stores in the first place. And think of the energy stores use to light, cool and heat their buildings. There are many existing tax incentives designed to encourage energy efficiency. Web retailing should be considered a green enterprise worthy of some form of tax break.

But if a 3.5% sales tax on e-retailers is fair, there is still the problem of states each collecting sales taxes from hundreds of thousands of e-commerce web sites from around the country. States aren't equipped to do that, and at best would be able to efficiently collect sales levies from only the largest e-retailers. A federal excise on e-commerce in the U.S. is a more practical solution to taxing sales on web retailing, which is fundamentally an interstate activity that naturally falls under the purview of the federal government. The federal government, however, should not retain such funds. Rather, federal excise taxes on e-retailers should be distributed directly to the states based solely on each state's e-retailing sales.

This is a middle-ground proposal designed to appeal to both sides of the web tax debate. Sadly, hoping for compromise in the public arena these days of over-the-top partisanship is itself an exercise bordering on lunacy.

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