The problem stems from a tax loophole that prevents states from requiring online retailers to collect sales taxes unless the retailer has a strong physical presence in the state. The taxes are still technically owed, but the compliance burden and the penalties for non-compliance are shifted to the consumers. This makes online purchases the only place where customers are responsible for calculating and submitting the sales tax they owe. To make matters worse, most consumers don’t pay the sales tax owed for online purchases. Some are taking advantage of a system that lacks real enforcement mechanisms, while others simply don’t know the rules.
There is a solution gaining support in Congress, however, that would allow states to update their sales tax laws and bring them into the Internet Age. The Marketplace Fairness Act permits states to adopt a streamlined sales tax law that will apply to all retailers regardless of location. It won’t impose new taxes, but it will require online stores to follow the same rules that brick-and-mortar retailers follow.
Some detractors have tried to compare the Marketplace Fairness Act to the Stop Online Piracy Act (SOPA) and Protect IP Act (PIPA), the wildly unpopular efforts to give government more control over Internet content. But the MFA could not be more different. SOPA/PIPA could have destroyed legitimate sites on the Internet; the MFA would simply make it clear that sales tax collection lies with the online retailer rather than the consumer who may be unknowingly violating tax law.
Nobody loves paying sales tax, but most of us can agree that it should be enforced equitably. The federal government has a role in regulating commerce by ensuring that out-of-state sellers are not favored over brick-and-mortar, in-state sellers. Unless it addresses this issue, Congress will be endorsing a system that picks winners and losers by giving an unfair advantage to online retailers simply because their storefronts are digital.
Thanks to consumer electronics, the world is changing fast. We have new ways of getting information, connecting with friends, and even buying the things we need. But in order to ensure that the market remains free, tax law needs to keep up with this changing world. Government should apply the tax burden equitably across the board so that all business can compete under the same rules.
Shapiro is president and CEO of the Consumer Electronics Association (CEA)®, the U.S. trade association representing more than 2,000 consumer electronics companies, and author of the New York Times bestselling book, “The Comeback: How Innovation Will Restore the American Dream.”