It Was Fun While It Lasted

[Editor’s note: The Supreme Court ruled Thursday that states may collect taxes from online retailers in a 5-4 decision (see South Dakota v. Wayfair, Inc. and the Court’s decision written by Justice Kennedy from SCOTUS Blog). Bearing Drift’s Brian Schoeneman agreed, originally making the case in this post from April 24, 2013.]

As my colleague Norm Leahy noted Tuesday, the Marketplace Fairness Act (the internet sales tax) has advanced in the Senate. This has caused some wailing and gnashing of teeth amongst those opposed. The opposition includes the retailers who stand to lose the most, including Ebay, who sent out email to all of their members urging them to oppose the bill – something I can’t recall them ever doing before on any legislative issue.

The Washington political class has also weighed in, as Heritage and others have also come out against the bill, despite it having support from a bipartisan group of legislators and state governors, including Virginia’s Bob McDonnell.

Well, it was fun while it lasted. But it’s time to fix this.

Everyone should have seen this coming. It is inherently unfair to tax somebody who buys a product in a brick and mortar store while not taxing someone who buys the exact same product online. And let’s be honest – it’s always been a guilty pleasure to save a few bucks by buying online and not paying the tax.

The only thing surprising is that it has taken this long. You can get nearly any new product you want on Amazon, and nearly anything at all on Ebay. As the online marketplace has grown staggeringly over the last fifteen years, it was only a matter of time before their brick and mortar competition pointed out that unfairness. And while it has always been unfair, with the advent of tablet computers and smartphones, the problem got even worse.

Stores, like Best Buy, that sell high-end products that people tend to shop around for were being undercut in their own stores. Shoppers would visit the store to play with gadgets and pick out what they wanted, and then order the exact same product from Amazon or another site to save on the sales tax. And with services like Amazon Prime where you pay a pittance to get free 2 day shipping on every product – with many items arriving even sooner – there was almost no advantage to going to a regular store.

Between the higher costs of operating a brick and mortar store and the tax breaks the online sellers got by not having to collect sales tax on most purchases, the traditional retailers were getting their clocks cleaned by online retailers. Yes, most of the largest traditional retailers have online components, but their brick and mortar locations put them at a competitive disadvantage to the Amazons and Ebays of the world. Amazon is one of the fastest growing retailers in the country, and part of that is because of this sales tax loophole they’ve been able to exploit.

The arguments against the Marketplace Fairness Act are relatively weak. The claim that the bill will hurt small online businesses ignores the fact that these small businesses unfairly compete against traditional small businesses that have a storefront. It’s akin to arguing that we shouldn’t ban performance enhancing drugs from sports because it will hurt the athletes who took them. Besides, the bill only affects businesses with $1 million or more in sales, which most small businesses don’t have.

As for this being a tax increase, it’s not. At least, not in Virginia, where you probably didn’t realize you’re supposed to pay Sales and Use tax on your online purchases already (even though nobody does it). There is no federalism issue here, either, because states that don’t collect sales tax aren’t affected, and each state will still be able to set their own rates.

Heritage has claimed in a viral Facebook ad that small online businesses will have to compute sales tax for the 9,646 different sales tax jurisdictions out there. Sounds to me like a perfect opportunity for a small businessman – come up with a program that computes the tax and sell it to the online retailers (states, by the way, are required to pay for this, not the retailer). Whoever steals that idea can thank me later.

At the end of the day, this issue revolves around one issue alone: fairness. It’s simply unfair to require one business to charge sales tax because they invested in Virginia by opening a store and hiring employees, while allowing another – many who haven’t made the same kind of investment – to not collect the tax.

Republicans don’t like tax increases, but we don’t like corporate welfare, either. And this is a form of corporate welfare – it’s tax breaks for some companies that effectively creates winners and losers. Not applying the sales tax evenly disadvantages traditional retailers who have made larger investments in our neighborhoods and that’s exactly opposite what we should support.

Taxes are a necessary evil and we should, of course, do everything we can to keep them as low as prudence dictates. We should also do everything we can to ensure fairness and close loopholes that distort the marketplace. Every business – small or large – deserves a level playing field.

It was fun while it lasted, but it’s time to fix this problem.