Closing the online tax loophole

The Washington PostJuly 17, 2012 

— The following editorial appeared in Monday’s Washington Post:

An increasing number of states have passed laws that require customers to pay sales tax on Internet purchases.

Although a 1992 Supreme Court ruling – Quill v. North Dakota – holds that companies without a “substantial nexus” (read: physical presence) in a given state don’t have to pay taxes on purchases made there, that changes when corporations such as Amazon name local affiliates or set up physical distribution centers. Virginia voted this year to close the so-called “Amazon loophole,” which allows the online retailer to avoid paying the same local sales taxes that brick-and-mortar establishments charge. California and Texas have taken steps to do the same.

The change is overdue. There’s no reason to favor e-commerce at the expense of other business, and it makes no sense to require some businesses to charge more for the same goods. To that end, a bipartisan bill under consideration in the Senate, the Marketplace Fairness Act, would grant states the authority to require “remote sellers” to collect sales tax in exactly the same way as local businesses are already made to do.

Of course, that’s much more difficult than it sounds, and critics are right to point out that two Supreme Court rulings have warned of the complications that will inevitably arise in any attempt by retailers to collect sales tax from multiple states at once.

To answer those concerns, the legislation requires that those states that choose to adopt online sales taxes must either implement a common set of guidelines for streamlining and simplifying tax collection or, if not, meet five basic simplification mandates stipulated in the bill. Whether these requirements are enough to streamline tax collection is not certain, but they are at least a step in the right direction.

Critics also allege that the revenue that states would receive under the bill wouldn’t add up to 1 percent of the total annual revenue derived from sales taxes. As The Post reported last week, however, up to $23 billion in revenue could be generated if online retailers were required to charge the same amount of sales tax as brick-and-mortar establishments.

Had the act already been in effect this past year, Virginia could have gained an estimated $432 million, Maryland $376 million and the District of Columbia $72 million. Given that Maryland and Virginia faced projected budget shortfalls of $145 million and $1.1 billion in advance of fiscal 2013, that’s money that could be well spent.

The Marketplace Fairness Act may be imperfect, but the price of maintaining the status quo is too high. For the sake of state coffers and local businesses, Congress should approve it – and states should adopt it in due course.

The Washington Post

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