Main Street and Internet Businesses Should Live By the Same Sales Tax Rules

In a Debate Club post for U.S. News and World Report today, I explain how states’ inability to require out-of-state Internet retailers to charge sales tax hurts local economies.

Not only is the prohibition unfair to local businesses — which must collect sales taxes — it imposes costs that many people might not recognize, as I describe in the post:

It slows local economies and costs jobs.  Sales taxes typically range from 5 to 10 percent, so local businesses start out at a 5 to 10 percent price disadvantage compared to Internet retailers that don’t collect taxes.

When local stores lose sales to Internet retailers, the least that happens is that they don’t hire as many people as they would if their sales were higher; at worst, they go out of business.  In both cases the damage ripples through the local economy, as lower employment for the bookseller or clothes boutique translates into lower sales for the local restaurant and dry cleaner.

It weakens public services.  Each year, about $11 billion in tax on Internet sales goes uncollected.  That’s $11 billion that states and localities don't have to support schools and hospitals, pay and equip police, build and repair roads, and provide the many other services that all residents use.  And, as online shopping continues to grow in coming years, so too will the revenue losses.

It shifts more taxes to those who can least afford them.  Even apart from the Internet sales tax issue, poorer families pay a larger share of their income in sales taxes than better-off families do because they have to spend almost everything they earn.  Tax-free Internet shopping compounds the problem:  many low-income families would love to shop online to avoid sales tax but can’t because they don’t own a computer or can’t afford high-speed Internet access.

Contrary to the assertion that one of my debate opponents, Steve DelBianco, has made, these problems aren’t on their way to being solved.  Amazon and thousands of other Internet and catalog merchants won’t collect tax in every state until federal legislation is enacted, and a significant share of consumers will continue to use local businesses as showrooms and then shop online deliberately to avoid sales taxes (as considerable research shows).

We can reasonably debate how big a business needs to be before it should be obligated to collect sales tax on a nationwide basis, but legitimate concerns about compliance costs for small businesses are no excuse for exempting large companies like Amazon and Overstock that are perfectly capable of collecting tax everywhere — just as their brick and mortar competitors do.

It’s time for a sales tax that puts Main Street businesses and interstate retailers on a level playing field, treats all families equitably, and helps states and localities pay for critical services like education and health care.