Virtual Stores Should Pay Real Taxes

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April 23 (Bloomberg) -- Since the birth of the Internet, online retailers and consumers have guarded the tax-free click. Not having to collect state sales taxes has allowed digital stores to flourish. Shoppers have been able to find what they want in regular stores, only to order the same product online -- tax-free.

And online sales have exploded. Last year, the U.S. Census Bureau estimates, retail e-commerce totaled $225 billion, an increase of almost 16 percent from 2011. Online purchases now account for 5.2 percent of total retail sales.

The subsidy -- worth about $23 billion today, according to Bloomberg News, and about $52 billion in unpaid state sales taxes since 2006 -- has helped nurture e-commerce through its startup, even if success came at the expense of brick-and-mortar rivals. But now that e-commerce has grown up, it isn’t necessary to keep coddling the industry.

The Barack Obama administration agrees, as do many U.S. senators. Seventy-four of them voted yesterday to begin debating legislation that would allow states to collect taxes from out-of-state Internet vendors selling goods to their residents.

Large retailers, including Wal-Mart Stores Inc., support the measure. So does online giant Inc., which had clashed with many states over its refusal to collect sales taxes in the past. More recently, it has been building shipping centers across the U.S. to speed delivery of its packages. The expansion has added to Amazon’s physical presence in many states, along with its obligation to collect sales taxes.

Five States

On the other side is EBay Inc. (which is asking millions of small businesses and consumers that use its digital marketplace to lobby against the bill), the five states without sales taxes and those who oppose any tax, even one that leads to a more equitable system.

It would be incorrect to portray this as an alliance of big business and big government against small business and consumers. For one thing, it isn’t really a new levy. It’s true that retailers with no physical presence in a state haven’t had to collect state sales taxes since a 1992 Supreme Court decision. Shoppers, however, are supposed to pay sales taxes voluntarily as part of their annual filing. It’s almost impossible to get caught cheating, so hardly anyone complies.

The Senate bill also wouldn’t force states to collect tax; it only frees them to do so. New Hampshire, Oregon and other states with no sales tax could continue with the status quo. Moreover, retailers with less than $1 million in out-of-state sales would be exempt.

Some lawmakers claim that the legislation would be a burden on companies that lack the resources to keep track of thousands of state and local sales tax rates. This is overblown. States would have to simplify their tax systems before requiring other jurisdictions to start remitting taxes; at any rate, off-the-shelf software now makes it relatively easy to keep track of the array of sales levies.

When it was in its infancy, e-commerce received necessary exemptions. Now that it has reached adulthood, there’s no reason it shouldn’t be treated, and taxed, like a grown-up.

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