It's Time For A Federal Solution to Online Sales Tax Evasion


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If you’ve ever bought something online, then most likely you’ve cheated on your taxes.  Not many realize it, but people making online purchases are required to pay sales taxes on those purchases directly to their state government.  Unfortunately, hardly anyone reports these taxes (either because of ignorance or a desire to save a buck), and the law is essentially unenforceable.

In an effort to remedy this situation, Senator Dick Durbin (D- IL) has once again introduced the Main Street Fairness Act.  The bill would require online retailers above a certain size to remit taxes on sales made in states that have taken steps to simplify their tax systems.  Essentially, this bill would relieve the buyer of their responsibility to calculate and pay the sales tax themselves.  It’s a bill that has been introduced before, but with online shopping (and state efforts to tax it) growing at an increasing rate, it’s now more relevant than ever.

Opponents of the bill have incorrectly labeled it as a tax hike.  The bill doesn’t actually create a new tax, nor does it raise an existing one.  Rather, it merely creates a mechanism to collect taxes that have always been owed.

Failing to collect these taxes creates two major problems:
1) States are losing out on badly needed revenue.
2) Traditional brick and mortar stores are at a competitive disadvantage when their customers have to pay a tax that online shoppers are able to evade.

As an extreme example of this second problem, in many instances customers will go so far as to examine and “try out” merchandise at stores, only to return home and purchase the same product online in order to evade their sales tax responsibility.

It’s no surprise then that numerous organizations representing retail owners, such as the Retail Industry Leaders Association (RILA), support the bill.  As one of their spokespeople said, “It is time to close this decades-old loophole and level the playing field for all retailers.”  And specific “brick and mortar” companies, ranging from Wal-Mart to independent book stores, have come out in support of the legislation as well.

Notably, the bill contains two important provisions meant to address concerns among online retailers about the difficulty of complying with state sales tax laws.  First, the bill would only allow states to require online sellers to collect sales taxes if they have first simplified their tax systems. Second, the bill would also exempt “small sellers” from the requirement, since small businesses are the least likely to have the resources necessary to comply with state sales tax laws.

Amazon has long opposed the small seller exemption, a position reiterated most recently in itsJuly 29 letter to Senator Durbin.  (Michael Mazerov of the Center on Budget and Policy Priorities suggests three reasons why Amazon opposes this exemption in the Appendix of his November 2010 report.)  And while Amazon thanked Durbin for introducing the newest version of this bill, it has stopped short of an outright endorsement.  It remains to be seen how seriously Amazon plans to push for eliminating the small seller exemption, and whether such a push could endanger the entire bill.

On the plus side, the increasing level of interest states are showing in solving this problem themselves has intensified the push for a comprehensive federal solution.  Battles over online sales taxes have been waged in over twenty states in just the last three years, and there are no signs that interest in the issue will wane any time soon.  But as ITEP explains in its recently updated policy brief, only a federal solution can solve this problem entirely.  As Durbin put it, “If you do it on a national basis, there’s hardly a complaint one state is being disadvantaged over another.”

The Main Street Fairness Act has had bipartisan support in the past, though this time around only Democrats have signed on so far.  In theory, conservatives should be very interested in the bill as it removes a longstanding economic distortion.  It’s a common sense solution to a longstanding problem and is a win-win in that it can generate revenue for cash-strapped states while also improving the competitiveness of Main Street businesses.


Photos via American Progress Action Fund & Soumit Creative Commons Attribution License 2.0

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