Would you rather save $50 when you buy that HDTV from an online retailer or watch your house burn down because the nearest firehouse closed? Maybe you'd prefer to see your kid sit in an overcrowded classroom with 40 other students? That's not a hypothetical question. Every year, the tax-free status of Internet retailers costs state, county, and city governments at least $11 billion, a budget-busting sum that has contributed to the layoffs of thousands of public employees over the past few years.
The free ride, though, may be coming to an end. Legislation to plug the huge loophole passed a critical test in the Senate this week, moving to the floor on a 74-20 vote. That's right -- just under three-quarters of a body that can hardly name a post office without somebody launching a filibuster is willing to take up this topic.
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The Marketplace Fairness Act, as it's called, would allow state and local governments to require large Internet retailers and other "remote sellers" with annual sales exceeding $1 million to collect sales taxes and send the revenue to the appropriate location.
It's not just those governments that will win if this passes. Brick-and-mortar retailers, the kind of businesses that actually hire people in your community, will no longer have to charge at least 5 to 10 percent more (depending on the sales tax where they do business) than online giants like eBay, Overstock, and in 41 states, Amazon. Talk about an uneven playing field.
What's more, retailers are being reduced to showrooms for online stores, where people come in to get their hands on a product, see if they like it, then leave and buy it online for less.
No one enjoys paying taxes or spending more for items they really want. But the Markeplace Fairness Act really is fair, and the days of tax-free commerce on the Internet should be long gone. And despite claims to the contrary, the technology already exists that will make it relatively painless for mid-sized Web businesses to collect sales tax.
A tax-free ride for 21 years
Back in 1992, the U.S. Supreme Court ruled that states could not order retailers that don't have a physical presence in the state to collect sales tax. At the time, that really meant mail-order catalog merchants, a big business in those days, but by extension, it has applied to Web retailers as well.
Fighting ensued over the meaning of that ruling, and skirmishes between local governments and Web merchants have been something of a full employment act for lawyers and lobbyists. Big bucks from companies like Amazon on one side and brick-and-mortar types like Best Buy on the other side have flowed to Washington and many state capitals. It's not accurate to see this fight as big business versus small business.
The real issue is the integration of the rising digital economy with the traditional economy. By exempting digital merchants from the duty to charge and collect sales tax, the government is, in effect, giving one sector of the economy a huge subsidy it no longer needs. What's fair about that?