Tennessean: Op-Ed by Sen. Alexander: It's time to close the online sales-tax loophole

Posted on November 20, 2011

There is a great big tax loophole in this country that has subsidized some taxpayers at the expense of others and some businesses over others, and restricted states’ right to collect taxes that are already owed to pay for the services their residents expect. I call it the “online sales-tax loophole.”

You may be surprised to learn that when you buy a TV online, you owe the same state sales tax that you would pay if you had purchased the TV at the electronics store on Main Street. But many online sellers don’t collect the state sales tax, and many purchasers don’t pay it, even though they owe it.

The owner of the Nashville Boot Co. told me recently that people come into his store and try on his boots and get his advice, and then they go home and buy the boots online so they won’t have to pay the sales tax. That wastes his time, the wages he pays his employees, and the money he spends to keep the store open. Above all, it isn’t right.

So, not only is he losing business because he is required to charge and collect Tennessee’s sales tax, but, as the conservative writer and founder of National Review, William F. Buckley, put it, he’s basically “subsidizing” out-of-state businesses that ship their boots into Tennessee without collecting the tax. And Al Cardenas, chairman of the American Conservative Union, recently said the loophole is “unfair” and “punitive to some small businesses and corporations and a boon for others,” and that there “is no more glaring example of misguided government power than when taxes or regulations affect two similar businesses completely differently.”

Main Street retailers are up in arms about the unfairness of this online sales-tax loophole.

Governors and legislators are up in arms, too. According to the National Conference of State Legislatures, next year this online sales tax loophole will cost states $23 billion in avoided taxes. For example, in Tennessee the maximum sales tax is 9.75 percent. Therefore, a $400 TV could be $39 cheaper purchased online than it would be from a store in Maryville or Memphis. Beginning to collect the lost money could help to avoid the arrival of a state income tax — possibly the most hated words in Tennessee.

So why haven’t states closed the loophole?

The short answer is: That had been too complicated. If you buy those boots from the Nashville Boot Co., by law the store collects the tax and sends it to the state. If you buy boots from someone out of state, you are supposed to pay the sales tax yourself, either on your annual state return or on a separate form required by the state. Of course, keeping track of all your online purchases is something even an accountant might have a hard time doing, so many Americans fail to pay sales taxes they owe on these purchases.

Then why don’t state laws require online sellers to do what Main Street sellers do? Because in 1992 — when technology for businesses to compute and collect taxes was not nearly as advanced — the U.S. Supreme Court said that without congressional approval, states could not require out-of-state businesses to collect sales taxes because this created too much of a burden on interstate commerce. The court invited Congress to solve the states’ problem.

To do just that, 10 U.S. senators have introduced the Marketplace Fairness Act, bipartisan legislation offering states two ways to make it simple for out-of-state sellers to collect taxes. Our proposal exempts small sellers — those with out-of-state annual sales of less than $500,000 — from collecting any tax at all.

Some — mostly taxpayers and out-of-state businesses — argue that we would create a new Internet tax. This is wrong. We are talking about the plain old state sales tax — and all of us in Tennessee and 44 other states already owe it when we shop online.

This bill is about allowing states to close a tax loophole — if they choose to. It gives states the right to stop the subsidization of some taxpayers over others and the subsidization of some businesses over others. And that is just good tax policy.