The downside of eCommerce

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Clicking a mouse rather than getting behind the wheel also reduces congestion on the roads, saves fuel and time, and reduces pollution.  And for Americans who live in remote areas or who lack the means or ability to shop physically for all their needs, the Internet can be, quite literally, a lifeline.

But for all the benefits that come with growing e-commerce there is at least one big downside too, thanks to a court ruling that says retailers don’t have to collect sales taxes in states where they don’t have a “physical presence” until Congress authorizes such collections.  

This tax loophole unfairly tilts the competitive playing field in favor of Internet-only marketers.  It is one of many factors making it increasingly hard for brick and mortar stores—particularly main street businesses —to survive.  At the same time it is driving many state budgets deeper into the red.

That’s because all but five states in America levy sales taxes, which typically range from 4 to 10 percent.  On average, sales taxes account for roughly a quarter of the revenues collected by state governments.  According to the National Conference of State Legislatures, the Internet sales tax exemption could cost states more than $23 billion in lost revenues for 2012 alone.  These losses come at a time when states all around the country are struggling to fund vital services such as schools and health care for the disabled.  

Of course, no one likes to pay taxes.  But closing a tax loophole isn’t the same as creating a new tax: On-line shoppers in most states already owe these taxes—it’s just that the taxes are rarely paid and currently impossible to enforce.  The issue, in other words, isn’t whether to tax or how much, but rather whether it’s fair to (in effect) tax an item differently simply because it was bought on a computer versus at the store down the street. 

The good news is that states and retailers know how to close this loophole. In recent years a bipartisan group of governors has worked hard to simplify and streamline state tax laws so that e-retailers can collect sales taxes in a fair, accurate and efficient manner. The barriers to fixing the problem are no longer technical or logistical—they’re purely political.  All federal lawmakers need to do is  pass legislation, such as the recently introduced bipartisan Marketplace Fairness Act, that would give states clear authority to collect taxes on remote sales.   

As the federal government tries to put its own fiscal house in order and as federal funding for a whole host of programs—from Medicaid to bridge repair —gets cut, states will face a combination of declining assistance and increased need.  Under these circumstances, getting out of states’ way as they try to help themselves would seem the least that Congress could do.  

For a whole set of reasons it’s also the right thing to do.  After all, fairness and sound tax policy aren’t just for the real world—they should apply in the virtual world as well. 

Rounds served as the Republican governor of South Dakota from 2003-2011 and is now a member of the Bipartisan Policy Center’s Governors’ Council. Jason Grumet is president of the Bipartisan Policy Center.