The Real-World Cost of 'Tax Free' Online Shopping - Bricks-and-mortar shops suffer, and states are deprived of revenue.
In this postelection period, Congress is being asked to demonstrate renewed bipartisanship and fiscal responsibility. Managing our federal finances isn't the only opportunity to do that. Washington can also choose to stand up for Main Street and help state and local governments strengthen their balance sheets by closing the Internet tax loophole.
Local retailers—who create jobs for our families, friends and neighbors—have long been required to collect and remit state sales taxes. By contrast, online vendors that operate from out of state are under no such requirement, even though the taxes are still owed by the consumer in the 45 states that collect sales taxes. This disparity undermines the competitiveness of the retail marketplace and diverts $23 billion from state and local treasuries every year.
The problem doesn't arise solely when people search for supposedly tax-free deals online. "Showrooming" is also increasing. Imagine a customer who walks into a sporting-goods store and asks for help in buying the coolest new running shoes. An attentive salesperson spends half an hour with the customer to find the most comfortable fit, the best performance and the right price. Just as the salesperson thinks she has found the ideal pair, the customer decides to make the $100 purchase via smartphone from an online competitor who doesn't charge sales tax.
Such a scenario causes multiple harms. The retail staff has lost the time invested in the would-be customer. The store has lost profits. Over the long term, the rental market for retail property becomes weaker as tenants' profitability shrinks. And competition is eroded because the bricks-and-mortar retailer must meet its sales-tax obligation, whereas the online-only vendor might even tout the notion—misleadingly—that its sales are tax-free. The customer is responsible for remembering to pay the tax later (through an income-tax return or a use-tax report), but few do.
Then there is the lost public revenue. For every supposedly tax-free sale, fewer dollars are available for schools, infrastructure, public-safety providers or (in flush times) tax reductions.
In the state of Washington, the Department of Revenue estimates that leveling the sales-tax playing field would generate $240 million in state and local revenue in the coming fiscal year and $491 million by fiscal year 2017. The revenue would help the state make progress against its projected budget shortfalls. The next governor could fill gaps in education funding, and local governments would face less pressure to find other revenue sources.
As leaders in government and business, we aren't alone in calling on Congress to act. Traditional retailers, "clicks-and-mortar" firms and even Amazon AMZN -0.04%support federal legislation that would empower states to require out-of-state businesses to collect and remit sales taxes. In this day and age, retailers leverage information technology to speed products from inventory into customers' hands, and IT systems can readily handle tax collection and remittance chores.
Governors from both sides of the aisle have rallied behind two similar bills before the House and Senate. The congressional leaders driving the legislation hail from a diversity of states—Arkansas, Tennessee, Michigan, Illinois, Wyoming, California and more.
It is time for Congress to seize the momentum and fix this gaping pothole on America's Main Street.