Main Street merchants, still reeling from the economic devastation of the Great Recession, are one step closer to fair and equal treatment in the collection of sales taxes, thanks to the Senate’s recent passage of the Marketplace Fairness Act. The law, which passed with bipartisan ease, is long overdue and aims to rectify a distorted marketplace that gives online retailers an unfair edge over their brick-and-mortar competitors.
Under current law, retailers are only required to collect sales taxes if they have a physical presence, such as a storefront or distribution center, in the customer’s state. As a result, for more than 20 years, this rule has made online sales essentially tax-free, giving Internet retailers a significant advantage over their Main Street counterparts. By not paying sales tax, online sellers have been able to undercut, by 5 to 10 percent, traditional stores. And this gap only continues to widen as more consumers shop online.
Brick-and-mortar stores are further hurt by the rise of “showrooming,” a phenomenon in which customers browse and examine merchandise in stores to determine exactly what they want only then to take advantage of the sales tax disparity and purchase the product online at a lower cost.
So the question we need to ask ourselves, and our congressional representatives, is why would we give this kind of price-incentive advantage to online businesses over brick-and-mortar shops? What have they done to deserve this kind of favoritism?
The answer dates back to the dawn of Internet retail, when it was a relatively new business enterprise. In an effort to bolster the innovative marketplace, state tax regulations were lifted. But it is clear that online commerce is now firmly established, and the need for this kind of advantage no longer exists. Just look at the numbers. According to a recent government survey, e-commerce sales in the U.S. totaled $226 billion in 2012, a 16 percent jump from the previous year.
To be clear, the Marketplace Fairness Act does not impose any kind of new tax on businesses or increase current tax rates. It is merely requiring that the tax be collected. As it stands now, consumers are obligated to pay the sales tax for Internet purchases on their own, but most people are unaware of this requirement. Moreover, states have no practical way of enforcing it. The new legislation, which exempts online businesses with annual sales below $1 million, would solve this problem by forcing everyone to comply, guaranteeing that the taxes already owed would in fact be paid and funneled to the appropriate state, city and county coffers.
Ultimately, the bill levels the playing field between online and offline retailers. The free market only works when businesses, whether large, medium or small, can fairly compete on all levels. And during these tough economic times, the legislation would also give a vigorous boost to metropolitan economies by helping to stimulate growth and create jobs. Under the proposed bill, it is estimated that state, city and county governments would be able to collect $23 billion each year from remote sales, a critical infusion of funds that could be invested in local infrastructure and basic services.
The Senate demonstrated this week that they could put aside partisan differences in order to come together to do what is right, ensuring that the U.S. marketplace fosters fair and healthy competition. The question remains as to whether or not the House of Representatives will follow their lead and finish the job by enacting this common sense solution. We urge them to do so.
Cochran is CEO and executive director of the U.S. Conference of Mayors.