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Senate Calls for Level Playing Field for Main Street Retailers

The Senate signaled support for requiring large Internet merchants to collect state and local sales taxes, just like Main Street retailers must do, voting overwhelmingly in its budget resolution to “allow states to enforce state and local use tax laws.”

Allowing states to do so would not impose new taxes.  State and local sales taxes are already due on any items a consumer buys online that would be taxable if he or she bought it in a local store.  But, as I’ve explained, a 1992 Supreme Court ruling allows Internet and catalog sellers to avoid charging sales tax to a customer if they do not have a “physical presence” in the customer’s state.  In those cases, customers are supposed to pay the taxes directly to their states but, of course, very few do.

The Court’s decision left the door open for Congress to set rules under which states and localities could require even non-physically present merchants to charge sales taxes.  That’s what the Marketplace Fairness Act — which the Senate signaled support for Friday in an amendment to its budget plan — would do.

While the budget plan isn’t legally binding, the fact that the amendment passed on a 75-24 vote suggests that if the actual bill reaches the Senate floor, it will have no trouble attracting the 60 votes needed to overcome a filibuster.

The Marketplace Fairness Act authorizes states and localities to require large Internet, catalog, and other “remote sellers” with nationwide sales over $1 million annually to collect and remit their sales taxes, provided that states both pay for the software that facilitates nationwide sales tax collection and harmonize and simplify state and local sales tax rules to make tax collection easier for retailers.

Legislation along these lines is long overdue.  States’ inability to require large sellers like Amazon and Overstock to charge tax in every state hurts 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.

Public services suffer, too.  Each year, about $11 billion in taxes on Internet sales goes uncollected; roughly the same amount is lost from catalog, infomercial, and other remote sales.  That revenue could help 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, so will the revenue losses.

Finally, the unequal treatment of online sales 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 just to make ends meet. Tax-free Internet shopping compounds the problem:  many low-income families can’t shop online because they don’t own a computer or don’t have high-speed Internet access.

The only comprehensive solution is federal legislation akin to the Marketplace Fairness Act.  Friday’s vote makes clear that the Senate will likely approve the bill relatively soon.  Let’s hope the vote also sends a strong message to the House.