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Globe Editorial

Abolish unfair sales-tax break from online retailers

April 1, 2011

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THE ONLINE retailer Amazon.com is a household name not just because of its huge inventory, but also because of its competitive prices. For big-ticket purchases like computers and large TVs, purchasing on Amazon rather than at a bricks-and-mortar store can lead to savings of hundreds of dollars.

But these savings are based in part on an unfair advantage: the ability of Amazon and other online retailers to avoid state sales taxes. This exception can no longer be justified. It’s time for Congress to step in.

Because of a 1992 Supreme Court decision aimed primarily at mail-order catalogs, retailers are legally required to collect sales tax only in states where they have physical presences. So Amazon does have to collect sales taxes in states where it or one of its affiliate sellers has a physical presence. Yet Amazon, like some other online retailers, has managed its relationships with its affiliates to avoid collecting sales tax from customers in most states. The lack of sales taxes in Massachusetts contributes to Amazon’s price advantage over traditional retailers. (Theoretically, customers who buy from an online retailer are on the hook for paying their state’s tax; in practice, almost no one does.)

In the past, proponents of the de-facto exemption argued that online retailers needed that advantage to nudge consumers toward an unfamiliar platform for commerce. But this clearly no longer applies, as online retail sales could reach $200 billion in 2011.

Other arguments against the sales tax exemption are no more persuasive. Proponents have argued that online retailers shouldn’t have to collect local taxes because they don’t benefit from the local services that those taxes support. True, but online retailers also gain access to remote markets without paying the property taxes or payroll costs associated with having a brick-and-mortar outpost. Online retailers have also cited the difficulty of collecting taxes in states where sales tax rates can differ from city to city or even block to block, but increasingly sophisticated mapping software solves that problem.

So at a time of devastated state budgets and rising sales taxes, there’s no reason why online retail juggernauts should be exempt. Michael Widmer of the Massachusetts Taxpayers Foundation notes that sales tax receipts in the Commonwealth increased by an average of 9 percent per year in the 1990s, but just 1 percent per year in the last decade. This stark change is attributable in no small part to online shopping.

There is no state-level solution. When Texas tried to pressure Amazon into paying what the state said was $269 million in taxes owed, the company responded by shuttering one warehouse there and halting plans for another.

Congress should take steps to eliminate online retailers’ exemption from state taxes. Amazon and other big retailers should be able to afford the technology required to track and collect sales taxes across multiple jurisdictions. If Congress sees fit, smaller retailers could be exempted from the requirement, or offered loans or other assistance in covering the cost.

Amazon is no longer a humble startup. It and other major online retailers should no longer be exempted from a tax that countless smaller bricks-and-mortar businesses are responsible for collecting.