August 19, 2010, 5:15 PM

The Great E-Retail Sales Tax Debate

The states need the money and e-retailers are a great target for new sales tax revenue.

In my first blog on this site (Time to Bite the Sales Tax Bullet), I argued that e-retailers would soon have to relinquish their freedom from collecting sales taxes, because e-retailing is the fastest growing part of the retail economy and states are in no fiscal position to lose sales tax revenue every time the e-commerce channel grows at the expense of tax-collecting stores. It’s an unfair advantage that e-retailers are simply going to lose as the big chains and the retail store associations side with the state sales tax establishment.

Now a debate is raging in Washington over a proposed bill, The Main Street Fairness Act, which calls for Congress to support the Streamlined Sales and Use Tax Agreement and authorize signatory states to collect and remit sales taxes from customers from all states in the group. Those in favor of this legislation, including the National Retail Federation and the Retail Industry Leaders Association, argue that taxing e-retail sales would create a level playing field between stores and retail web sites. Those opposed to this legislation argue that this is a bad time to raise taxes on anybody given the fragile state of the economic recovery. Additionally, they fear sales taxes on web sites would be difficult to collect evenly and fairly and would place a heavy burden on hundreds of thousands of entrepreneurs whose only business is running small retail web sites.

Everyone understands where the NRF and RILA are coming from, although they must loathe being on the side of increase sales taxes on their members, all of who have tax-sheltered  retail web sites. Nonetheless, they understand that stores are losing market share to e-retail businesses that have an unfair advantage, and they are using the budget crises in virtually all state capitols to drive home their point. “This bill would create a level playing field between online merchants and local stores while ensuring 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.”

What Ms. Riehl fails to consider are the fundamental differences between a bricks-and-mortar store and a web store so far as state and local community services are concerned. It is true that sales taxes are critical for supporting local police, fire, emergency services and all the rest. It is also true that stores put service burdens on local communities that web sites do not. Stores rely on police to respond to complaints of thefts and robberies at their stores. E-Retailers don’t call the local police when hackers break into the web store. When stores catch fire, local firefighters respond. The 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. Not so with web stores. You get the point: web stores demand much less of state and local governments

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 behind such proposed policy, 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 to and from stores to buy the same merchandise—products that were trucked to those 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 and more are no doubt on the way. Web retailing should be considered a green enterprise worthy of some form of tax break.

I concede that there is the problem of 50 states each collecting sales taxes from hundreds of thousands  of e-commerce web sites. Each state would have to beef up its revenue department to monitor the collection of sales taxes from all retailers doing business in the state, and unlike offline retailing, most web businesses required to collect and remit the new Internet sales tax on e-retailers would come from outside of the taxing state and would easily outnumber the store-based companies that collect and remit sales taxes from stores they own in that state. States aren’t equipped to do that, and at best would be able to efficiently collect sales levies from only the largest e-retailers.

The answer for a fair and collectible sales tax on e-retailing, I think, is found in a federal excise on e-commerce in the U.S. This is fundamentally an interstate activity and taxing its sales should be a federal government function. I have greater faith in the federal government’s ability to collect taxes evenly from all e-retailers across the country than I have in the ability of all of the states to impose such a tax working in concert. The federal government, however, should not retain or have any control over the application of e-retailing sales tax funds. Rather, such federally collected excise taxes on e-retailers should be distributed directly to the states based solely on each state’s e-retailing sales—defined as purchases from e-retailing sites by shoppers residing in the state that receives the sales tax money.

This is a middle-ground proposal design to appeal to both sides of the debate. It is suggested in the spirit of compromise, despite the sad reality these days that hoping for compromise in the public arena is near lunacy.

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