Is this Cyber Monday the last without sales tax?

Our view: Some states need the cash from an online sales tax, but the real issue is leveling the playing field for brick-and-mortar retailers

November 26, 2012

Retail analysts reported a curious trend this Black Friday. On the traditional first shopping day of the Christmas season, the number of visits to malls, big box stores and other retailers increased, according to the analytics firm ShopperTrak, but the amount spent in brick-and-mortar businesses actually went down slightly from last year's total. Online shopping, meanwhile, jumped ahead of its traditional Cyber Monday kick-off and exceeded $1 billion on the Friday after Thanksgiving for the first time. Online shopping was up sharply on Thanksgiving day, too, according to comScore. That means many people braved the frenzied crowds and jammed parking lots to check out the holiday season merchandise, but when it came time to buy, they went home and logged on.

Why on earth would someone do that?

Perhaps some items were cheaper online, or the selection was better. But there is one big advantage online retailers have in almost every state: They charge no sales tax. In Maryland, for example, that amounts to an effective 6 percent discount on top of whatever holiday specials was already running online. That's a problem for the states and many local governments, which rely on sales taxes to fund basic services, and it's a problem for brick-and-mortar stores, and especially small, locally owned businesses.

A year ago, Comptroller Peter Franchot issued a report on the effect of online sales on Maryland's taxes, and he concluded that the state is now foregoing almost $200 million a year because of e-commerce. By 2020, he predicted the total would rise to $326 million. Mr. Franchot advised against any effort by the state to begin collecting those taxes, however, saying it would open Maryland up to litigation and could prompt big e-tailers to abandon what physical presence they have in the state now.

But the national landscape has changed since then. Last summer, New Jersey Gov. Chris Christie, a Republican, struck a deal with Amazon that will lead the e-commerce giant to begin collecting sales tax on purchases by New Jersey residents. And far from prompting Amazon to abandon the state, it is building two state-of-the-art distribution facilities there as part of the deal. The Wall Street Journal reported in July that Republican governors in Virginia, Texas and Nevada had recently struck similar arrangements with Amazon.

A 1992 Supreme Court ruling, made before online shopping became a significant part of the retail landscape, held that states could not apply the sales tax to e-tailers unless they had a physical presence in the state. But the court's decision left open the possibility that Congress could step in and set a national standard for online sales taxes. Mr. Franchot's report concluded that a national solution would be ideal, but until recently there had appeared to be little chance that one was forthcoming.

Legislation on the matter has previously languished because of Republican opposition, and little wonder; it could be construed as breaking no-new-taxes pledges, and it wouldn't even help the federal government with its budget woes, since sales taxes are the province of the states. However, the idea has at least two prominent Republican backers, Sens. Lamar Alexander of Tennessee and Mike Enzi of Wyoming, and there is a way it could work into the broader conversation about taxes and spending now underway in Washington as lawmakers look for a solution to the so-called "fiscal cliff" set to hit in 2013. The New York Times reported this weekend that governors of both parties are increasingly lobbying for a voice in the budget negotiations out of fear that spending cutbacks could devastate their budgets, which are typically reliant on federal aid. Allowing states to collect sales tax on Internet purchases would be one way for Congress to cushion the blow.

Unlike many states where interest in Internet sales taxes has increased recently, Maryland is not in desperate need of new revenue. But the issue is still important, for two reasons. The first is that Maryland's old, industrial-era sales tax has not kept up with the shift to a service economy, much less to an Internet economy. Unless it is broadened, less and less economic activity in the state will be subject to the tax as time goes on, making it a poor instrument for funding state government. The second is that it is a matter of simple fairness. The massive sales figures for online retail this holiday season prove that e-tailers are in no need of any advantage over their brick-and-mortar competitors. We need to level the playing field so those businesses that contribute to our communities and employ our neighbors have a fair shot.

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