Minneapolis Star Trib Editorial on E-Fairness: Taxing Sales -- Include Internet, Telephone, Catalogs

Minneapolis Star Tribune Editorial -- February 27, 2003, www.startribune.com

Taxing Sales -- Include Internet, Telephone, Catalogs

When it comes to collecting sales taxes on retail purchases, there now are four classes of retailers.

There should only be one.

The first of the classes are the traditional "bricks-and-mortar" retailers that have always collected the tax for the states where they operate. Then there are those traditional retailers, like Target Corp. and Wal-Mart, which are building their online presence and integrating it with their bricks-and-mortar operations. Increasingly, they, too, are collecting taxes on their online sales.

Third comes the pure online, phone or catalog retailers like Amazon.com that don't collect sales taxes. Finally come the online retailers like Barnes & Noble that have spun off their bricks-and-mortar operations so they can avoid collecting the taxes on their online sales in most states.

That confusing array results from a 1992 Supreme Court ruling that firms selling online, over the telephone, or by catalog could be required to collect sales taxes and remit them to the state of the customer's residence only if they also had a physical presence -- a store or warehouse, for example -- in that state. So Sears had to be a tax collector in most states but Amazon.com didn't need to be. Barnes & Noble, plus a few other retailers, pretty blatantly abused the logic of the Supreme Court ruling by creating some degree of separation between their online sales and their in-store sales.

The situation created several unfairnesses -- to those businesses that suffered a significant cost disadvantage because they needed to add a six or seven percent tax to their prices while other retailers selling the exact same merchandise didn't, and to states -- which were denied their rightful revenue on purchases made by their residents.

It is often argued that the practical effect has been small because Internet sales, though growing, still amount to only about three percent of the retail market. But if you combine the growing presence of the Web with burgeoning catalog and phone sales (the latter usually with a television link), the percentage of the retail market involved approaches 10 percent, and the sales tax revenues forgone by states becomes substantial. That is especially true with the states now in their worst fiscal shape since 1945.

Those like Amazon.com that oppose taxing pure Internet, phone, and catalog sales argue that it would be onerous and costly for them to calculate taxes owed in each of more than 7,000 taxing jurisdictions with unique rates. That has prompted more than 30 states, including Minnesota, to join in a national effort to simplify and streamline their sales tax rates -- in hopes that will someday encourage Congress to authorize taxes on all Internet, phone, and catalog sales.

But that's for the future, and the states could use the revenue right now. Moreover, the arguments of excessive burden are belied by companies such as Sears that have done the job easily for decades. Companies that have just begun collecting sales taxes on Internet sales, such as Wal-Mart, report that it wasn't very hard. Sophisticated software now exists -- and is updated regularly by its creators -- that allows retailers to easily integrate sales tax collections into their operations.

By some estimates, spreading retail sales taxes to Internet and other distance sales would generate as much as $19 billion for the states -- and create a level playing field for retailers in the process. That money actually is legally due the states now; consumers are supposed to pay it whether distant retailers collect it or not. They don't do that. Congress should make them, now, without waiting for the states to streamline their sales-tax collection laws. That effort should proceed, but it's not a legitimate hurdle that need be crossed before Congress acts.