All Online Sales Should Be Taxed

The dispute over whether should collect sales tax on its online sales to Tennesseans needs to be resolved. But the solution needs to come from Washington, not Nashville, and it should apply to all online retailers, not just Amazon.

The Main Street Fairness Act, as it's been dubbed, would accomplish this by allowing states that have adopted uniform sales tax ground rules to collect them on all so-called remote sales to their residents. Tennessee was in the forefront of the 24 states that, over the past decade, have entered into what's known as the Streamlined Sales Tax Agreement to achieve such uniformity. But the legislation authorizing them to proceed has languished in Congress up to now.

Congressional action is needed to override a U.S. Supreme Court decision in 1992 (when Internet sales were still in their infancy) that states could tax the sales only of firms that have a physical presence within their borders. But the court made it clear that Congress could set standards for states to extend their reach. And Amazon itself is now on record as supporting "a simple, nationwide system of state and local tax collection, evenhandedly applied to all sellers, no matter their business models, location, or level of remote sales."

That puts the nation's largest online retailer in the same camp with all the brick-and-mortar retailers who have long squawked about being at a competitive disadvantage. The National Conference of State Legislatures and the National Governors Association have also long been plumping for congressional action to stop the drain on state revenues from burgeoning online sales.

The University of Tennessee's Center for Business and Economic Research, which has established itself as the nation's foremost authority on the subject, estimates that e-commerce will cost state and local governments $12 billion in lost sales tax in 2012—and that catalog and other remote sales will add another $8 billion to that total. Since Tennessee accounts for about 2 percent of national retail sales, that equates to $400 million in foregone revenues in this state alone—enough to offset much of the damage done by the recession.

So with all that's going for it, and strong Democratic sponsorship in both the House and Senate, why isn't the Main Street Fairness Act on a fast track toward enactment?

One explanation for an apparent dearth of support from Republicans is that it's somehow been deemed taboo, violating their prevailing pledge to oppose any tax increases. But the sales tax laws of most states are also use taxes to which buyers are subject if the seller doesn't collect and pay them. The fact that most buyers have chosen to ignore their use-tax liability, which is well nigh unenforceable, means that collecting what's due from the seller doesn't constitute a tax increase.

More telling opposition to the legislation comes from small-fry online merchants and their mothership, eBay. A release from an organization called NetChoice contends it "would impose unfair and disproportionate collection burdens that...will break the backs of many small online businesses." However, the release goes on to note that, "Past attempts to pass similar legislation included a specific safe harbor that protected small businesses from the cost and complexity of a new Internet tax." [Specifically, businesses with sales of less than $5 million were exempted.]

By contrast, the version introduced this year by Sen. Dick Durbin of Illinois that got Amazon's backing would leave the definition of safe harbor up to a board of tax administrators from Streamlined states, which NetChoice contends is "like letting the foxes run the hen house." Yet a broader exemption runs afoul of Amazon's insistence on evenhanded application to all sellers.

While Gov. Bill Haslam is actively backing the legislation, Tennessee's Sen. Bob Corker has said he's on the fence and doesn't foresee any early action. "I have a feeling that over the next three or four years, it's something that will be resolved," he told a group of journalists.

Meanwhile, the state still has a further step to take in order to start collecting on remote sales if and when Congress allows it. Although Tennessee was among the first states to approve the Streamlined Sales Tax Agreement, the state Legislature has repeatedly deferred its effective date, most recently until 2013.

The reason is that a couple of its uniformity provisions represent sticky wickets. One of those would require that local option sales taxes go to the locality where a product is delivered rather than where it's sold. That could divert revenues from places like Knoxville that draw shoppers from several surrounding counties. But any such revenue loss would almost surely be more than offset by collections from online and other remote sales. Another sticking point is that a cap on the price of a single article that is subject to local option sales tax, presently $1,600, would no longer be allowed. Since the Legislature isn't about to let big-ticket items such as cars and boats get hit with higher taxes, it would have to find some way around this.

On the other hand, uniformity mainly applies to classification of goods and doesn't mean that all goods would have to be taxed at a single rate in a state, let alone that sales tax rates in all states would have to be uniform. So groceries could continue to be taxed differently and localities could continue to have different local option tax rates.

The governor and the Legislature should be concentrating on what needs to be done to start collecting taxes on all online sales to Tennesseans rather than haggling over whether Amazon alone should do so because it located job-creating distribution centers in the state (after getting a ruling from then-Gov. Phil Bredesen that it wouldn't have to pay them).