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With the
holiday season now in full swing, why are so many Main
Street retailers down in the dumps? The reason is
“Cyber Monday,” and it will likely go down as the
biggest online shopping day in the history of the
Internet.
The
Monday after Thanksgiving is the electronic equivalent
of the “Black Friday” shopping bonanza — minus the
throngs of mall shoppers hunting for holiday bargains.
And while online shoppers sitting at their desks don’t
draw news cameras like mayhem at the malls, the impact
of online retail on our communities is a story worth
telling.
Last
year, Americans spent more than $1 billion shopping
online on Cyber Monday. The National Retail Federation
predicts this holiday season, 36 percent of all
purchases will be made online. But too many of these
purchases will be tax-free, due to an unfortunate
loophole allowing e-retailers to shirk their role in
helping states collect sales taxes — which cost states
$10 billion last year alone, according to researchers at
the University of Tennessee. More tax-free sales mean
fewer tax dollars states can spend plowing the winter
snow or helping seniors pay their heating bills. Not to
mention the consumer dollars that won’t circulate in
our local economies because the current system rewards
online shopping with out-of-state businesses.
What is
this loophole? In 1992, the Supreme Court ruled that
states could not force a retailer to collect sales taxes
unless that retailer had a store, warehouse, or other
“physical presence” within the state. At that time,
it was a ruling about catalog and other “remote
sellers” who, the court decided, shouldn’t have to
navigate the often complex tangle of state and local
sales tax systems.
But
technological changes since 1992 make the court’s
decision far more consequential than they could have
imagined. Three years after this decision, Amazon.com
opened for business and online shopping has exploded
since then. At the same time, the court’s fears about
tax complexity are obsolete, since computer software now
makes it easy for remote retailers to calculate and
collect state sales taxes nationwide.
To be
clear, the problem is not that e-retailers are dodging
taxes, it’s that they aren’t collecting them from
consumers. While every state legally requires shoppers
to pay sales taxes directly to the government when
retailers fail to collect it, these laws are hopelessly
unenforceable as sales taxes were never intended to be
paid by individuals.
Those
uncollected taxes add up. The losses are growing every
year and the cumulative results are staggering.
Florida’s losses, for example, are $715 million this
year, a jump of more than $100 million since last year.
Illinois lost $383 million in 2010, and is facing a $450
million loss this year. New York and Texas are facing
sales tax revenue losses in excess of $700 million each
in 2011, and the list goes on. Every one of those
uncollected sales tax dollars is a dollar not spent on
public safety or education, and a dollar price advantage
we are giving to online retailers but denying to
businesses in our own towns.
In an
effort to regain those lost dollars, individual states
are beginning to strike ad hoc deals with some online
retailers, but the process is burdensome to states and
lets too many other companies off the hook.
The good
news is that Congress is looking at legislation that
would finally allow states to compel online retailers to
comply with their sales tax collection laws, so long as
those states simplify their sales tax systems and exempt
very small businesses. The bad news is, the current
Congress is about as gridlocked as the parking lot at
your local shopping mall on Black Friday.
But there
is reason for hope. Traditional retailers with big
pocketbooks, like Target and Home Depot, have finally
grown tired of watching their online competitors exploit
the no-tax loophole and are making their voices heard in
Washington. If these brick and mortar titans succeed,
they will, in the process, help level the playing field
for small local business and restore the public
resources we all depend on.
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