The U.S. Supreme Court’s refusal to hear a challenge to a 2008 New York state law aimed at taxing Internet sales is good news. It means New York and and other states that are collecting sales tax on purchases from online merchants, even those with no physical in-state presence, can continue to do so. But it still leaves a confusing, inconsistent patchwork of state laws that is a source of annoyance to both online and traditional businesses. The best, and fairest, approach is to have national legislation that treats all states, and retailers, the same.
Main Street retailers have long complained about tax-free Internet sales, and rightly so. It puts them at a competitive disadvantage against online retailers, who already in many cases can sell cheaper due to higher volume, lower overhead and other taxes.
In the early days of the Internet, opponents of taxation argued it would discourage this new form of commerce. If that was ever a valid concern, it is no longer. E-commerce is already huge ($226 billion last year), and the fastest-growing kind. Consumers are now using their local store as a showroom, a place to see and touch the product they are interested in before going online to buy it.
When that happens, it’s not only the Main Street merchant who suffers. It’s also the state and local governments, which are deprived of badly needed revenue. And if the locals are driven out of business, jobs are lost and the tax base is reduced, requiring the remaining businesses and property owners to pay more. A double or triple whammy.
For 20 years the controlling authority was a 1992 Supreme Court ruling that said states could require online retailers to collect sales tax only if they have a physical presence in the state. New York’s 2008 law extended the reach by saying they must collect the tax if they have affiliates or sellers within the state.
Since then New York has collected more than $500 million in taxes it wasn’t getting. But it’s still losing out on about $1.8 billion a year from Internet and catalog sales; and all the states, $23 billion.
With the Supreme Court’s latest non-decision, the states are now free to write their own New York state-style laws. Better for Congress to pass the Marketplace Fairness Act, which calls for the streamlined collection of sales tax on all Internet sales (except for small sellers doing less than $1 million in business.) The Senate has already approved it, but conservatives in the House can be expected to oppose on the grounds that it’s a new tax. It’s not new — just uncollected.