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End tax loophole for Web retailers

Updated: July 6, 2012 10:49AM

Suppose the Illinois Legislature arbitrarily created a loophole that made purchases on Michigan Avenue tax-free while requiring all other Chicago retailers to collect the full sales tax. Citizens and merchants alike would recognize the outrage and demand immediate reform.

This is roughly equivalent to the tilted playing field faced by brick-and-mortar
store owners who compete with online retailers.

To address this, a bipartisan group in Congress, including Sen. Dick Durbin of Illinois, has introduced the Marketplace Fairness Act — a bill designed to level
that playing field between the retailer around the corner and the one a mouse-click away.

Many people mistakenly believe the loophole was created to boost the once-fledgling world of e-commerce. In fact, this quirk was created not by Congress, but by a 1992 U.S. Supreme Court decision — a ruling handed down two years before the first Web browser was launched and three years before Amazon sold its first book. Under the ruling, remote sellers have to collect sales tax from customers only in the state where they are based or have a physical presence — leaving billions of dollars of sales untaxed.

The court’s decision hinged on the difficulty of requiring retailers to deal with the complexity of 45 state and 7,600 local sales tax systems across the country. Yet modern software, allowing sales taxes to be calculated as quickly and easily as shipping costs, renders this objection obsolete. Today, even online retailers like Amazon support the Durbin bill.

Businesses like American Sale, with eight locations throughout the Chicago area, would benefit from this legislation. It is a family-owned and -operated business, providing customers home recreation and holiday items. By law, American Sale is obligated to collect tax on every purchase made in its store, a requirement not shared by its online competitors.

Moreover, the taxes American Sale collects are being used to support the infrastructure — like roads and bridges — its online competitors are using to move their products to their customers. So not only does this loophole make it easier for the online retailer to make the sale, but local businesses, like American Sale, literally pay the price.

Ending sales tax discrimination would do more than help local retailers compete with online sellers. Hard-hit state and local governments would also be able to recoup some of the lost revenue from sales taxes owed but not collected by Internet merchants. According to the National Conference of State Legislatures, Illinois is estimated to lose more than $1 billion in sales tax revenue in 2012 for uncollected taxes on Internet sales.

In 2011, Illinois passed a state-level law requiring online sellers who have “affiliate” sellers in the state to collect sales tax. But a Cook County judge recently ruled the law unconstitutional, emphasizing the need for federal legislation that would meet the standards of the Supreme Court.

When jobs are at a premium, and businesses, especially on Main Street, are doing everything they can to keep their doors open, we shouldn’t be giving virtual retailers a tax handout. It’s time for Congress to create a level playing field for all retailers.

Matthew Shay is president and CEO of the National Retail Federation.

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