Report: Sales tax parity needed with online merchants

On the heels of a new report, retailers are reiterating the importance of Congress passing legislation to even out tax policy between brick-and-mortar and online merchants.

The Small Business Administration Office of Advocacy released a new analysis on Tuesday showing that online retailers have routinely benefited at the expense of so-called Main Street vendors of varying sizes because states can't require the payment of Internet sales taxes.

"The uneven sales tax collection playing field in the current policy environment has helped many small online retailers at the expense of many small “Main Street” vendors," the report said.

"However, Main Street vendors — small and large alike — would continue to be disadvantaged relative to many online and mail-order vendors that would be protected by an [small seller exemption] SSE."

Under the Senate-passed legislation and House-released principles on the issue, the number of retailers that would be subject to the requirements of the Marketplace Fairness Act "is a very small fraction of all online sellers," the report found.

The Senate measure includes an exemption for business with less than $1 million in annual out-of-state sales.

David French, senior vice president at the National Retail Federation, said the report "confirms what local retailers have been saying for decades: the lack of a level playing field between brick-and-mortar stores and their online and remote competitors is blatantly uneven and unfair, and continues to place them at a competitive disadvantage."

“The $24 billion sales tax gap, which is expected to grow with the rise of online shopping, will continue to disadvantage local retailers and employers, threaten Main Street communities and neighborhoods, and put additional policy and political pressure on state and local officials to increase non-sales tax revenue, like property or income taxes, to compensate for the growth in online sales," French said.

But there is still plenty of opposition, including from eBay, which disagrees with the defintion of small business in the legislation.  

Brian Bieron, eBay’s executive director of global public policy, said the report does not offer a fresh perspective but, instead, "rehashes outdated studies that underestimate small business Internet commerce and fails to address the compliance and enforcement issues, including out-of-state audits and investigations, that continue to raise deep concerns with the Marketplace Fairness Act."

Proponents argue that those uncollected billions in sales taxes would help state and local economies balance their budgets. 

Overall, an SSE of $1 million would subject only a small share of business to the internet sales tax — less than 4.5 percent of electronic shopping and mail order houses and less than 2 percent of all non-store retailers, the report said.

However, the volume of sales transactions subject to the tax would represent 57 percent of total U.S. online retail sales. 

A higher SSE of $5 million would affect an even smaller share of online retailers, but the share of online sales affected would remain near 57 percent, the report showed.

“It simply doesn’t make sense for government to pick winners and losers in the economy by giving online-only sellers special treatment in the tax code,” said former SBA administrator Hector Barreto, a proponent of the legislation.

"This report confirms the need for Congress to level the playing field and give America’s small retailers a fair shot to compete in the free market."

The report also found that while an SSE provision would reduce administration and compliance costs for small online merchants it also would reduce the potential revenue gains to state and local governments by exempting a portion of online sales from taxation. 

“As retailers and merchants prepare for the all-important holiday shopping season, which NRF predicts will reach $602 billion this year, it is time for Congress to address this online tax loophole once and for all," French said.

He said that while Senate passage and the release of principles on the sales tax by House Judiciary Committee Chairman Bob Goodlatte (R-Va.) are positive developments "more must be done to level the playing field so all retailers can compete fairly and without bias."

Major retail chains are lobbying heavily for the legislation, arguing that current policy gives Internet-only firms an unfair advantage.

The Supreme Court has ruled that states cannot require a company to collect sales taxes when the company has no physical presence in the state.

This story has been updated.