Businessweek editorial: “To help Main Street, close the internet sales tax loophole”

Bloomberg BusinessWeek

Bloomberg BusinessWeek

Bloomberg Businessweek has published a terrific editorial in favor of online sales tax by the “co-founder of community development group American Independent Business Alliance.”

We were particularly happy to see him point out that technology makes it easy for online retailers to collect sales tax. Although the Supreme Court ruled in 1967 and 1992 that retailers need to collect sales tax only for states where they have a physical presence, that was long before technology changed both the marketplace and the collection of sales tax:

Internet retailing didn’t exist, so it’s unlikely the justices foresaw business owners punching a Zip Code into software that automatically calculates sales taxes or consumers instantly comparing product prices among shopping sites. . . .

Since then, the retailing world has been transformed by accelerating online sales, but the nearly 20-year-old ruling still governs. Until Congress acts, we’re stuck with online retailers enjoying a privilege that grossly distorts market competition.

TaxCloud, our comprehensive sales tax management service, is one of those services that “automatically calculates sales taxes,” but it also does much more: it files tax returns, generates monthly state-by-state reports, handles audits and exemptions, and more. The best part? It’s completely free. With services like TaxCloud available, it’s hard to imagine that the Supreme Court rulings exempting out-of-state retailers from collecting sales tax—which were entirely based on the idea that it would be too difficult—makes sense in today’s world.

The editorial also neatly summarizes the problems facing states:

The 45 states with statewide sales taxes face three major problems. First, their storefront businesses investing in local facilities and employees are severely handicapped when their remote competitors are effectively subsidized by 5 percent to 10 percent. Second, states will see substantial declines in sales tax revenue unless this imbalance is addressed. Lastly, Internet retailers are using the tax exemption to evade tax obligations even in states where they have obvious nexus.

Opponents of online sales tax often say that it’s major chain stores, like Best Buy and Wal-Mart, that are supporting online sales tax legislation. But the editorial points out that not only do small, mom-and-pop stores have more to lose when online retailers don’t collect sales tax, they contribute much more to communities, so their loss will have a much larger impact:

While both chains and independents are affected, the loss is especially harmful when local entrepreneurs close up shop. Studies by another community development group, Institute for Local Self Reliance, and economic planning consultancy Civic Economics have shown independents’ sales typically generate at least three times more local economic benefit per dollar than sales at chain outlets. A 2009 University of Tennessee study estimates that $11.4 billion will go uncollected on Internet sales next year, but the resulting loss of local retailers may outweigh the direct tax revenue lost to states and municipalities. 

We could quote even more from the editorial, but instead we’ll just suggest that you read it yourself.

We were puzzled by one thing in the editorial, however: the suggestion that it would be best “to apply a universal tax rate of, say, 5 percent for all interstate retail sales and divide the revenue proportionally among states.” There are two primary problems with this suggestion.

First, a universal tax rate would be taxation without representation. Sales tax rates are voted on by those who have to pay it. Applying a universal tax rate would be take that right away from voters and put it in the hands of the government.

Second, the author proposes a universal tax rate because of his concern that collecting online sales tax would be difficult for small businesses. But as we’ve discussed above, services like TaxCloud make it easy for a retailer of any size, even a sole proprietorship, to collect sales tax. What’s more, the Streamlined Sales and Use Tax Agreement has a small business exception—retailers with less than a certain amount of online sales would be exempt from collecting sales tax. So there’s no need to change the way sales tax works, taking away voters’ right to approve sales tax rates in the process, just to protect small businesses—they’re already protected.

But aside from that suggestion at the end, the editorial is a brilliant, well-reasoned argument, and we recommend you read it.

2 Responses to Businessweek editorial: “To help Main Street, close the internet sales tax loophole”

  1. […] recommend the editorial—which, incidentally, is just the latest in a long line of articles supporting online sales tax […]

  2. […] Businessweek editorial: “To help Main Street, close the internet sales tax loophole” – 5/2/2011 Apparently we need to request another briefing. […]

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