Our Serve: Leveling the Field
There are 45 states that charge a sales tax, ranging from 2.9% in Colorado to 7.3% in Arizona. If you purchase something at a retailer in those states, that cost gets added to the price you pay. But in most instances, the same isn’t true for purchases made online, by mail or by phone. Only a few states (including Arkansas, California, Connecticut, Illinois, New York, North Carolina, Rhode Island, Tennessee, Texas and Vermont) have made moves to try to collect sales taxes from retailers that don’t have a physical presence in their borders.
This situation came about from a Supreme Court ruling in 1992 that a catalog company, and by extension an internet vendor, only owed and had to collect taxes on sales if it had a presence in a state. The decision did not say it was unconstitutional for out-of-state retailers to collect sales taxes, just that federal law at the time didn’t authorize it. (And, something most people don’t know, if a consumer buys something that would be subject to sales tax in a brick-and-mortar store, technically it’s also taxable if they buy it online or by phone from out of state. The difference is the consumer is supposed to report and pay a “use tax.” In reality, though, other than big-ticket items, this isn’t enforced.)
Why is all this important? Brick-and-mortar stores find themselves competing with retailers that can offer merchandise at a lower cost. Meanwhile, states are seeing sales tax revenues shrink, and in some instances, businesses and jobs are disappearing. Think of your own buying habits — saving $10 to $15 on a $200 purchase can make a difference in where you buy.
What’s the answer? Having individual states enact sales tax legislation for out-of-state purchases isn’t a simple issue — there are dozens of different state sales tax rates and hundreds of other sales tax jurisdictions. Under current laws, it would be amazingly burdensome for an internet site, for example, to collect sales taxes.
But there are moves to simplify all this. The Streamlined Sales Tax Project, set up in 1999 by the National Governor’s Association, has the goal of simplifying sales tax laws to make it easier for non-traditional vendors to collect them. So far, about 25 states have joined this group. The SSTP depends on Congress changing federal laws, and bills introduced in both houses have been gaining support, including among some large internet retailers and groups such as the Consumer Electronics Association, who apparently figure paying sales tax is only a matter of time, so they may as well be in on structuring the legislation.
If federal sales tax legislation goes through, consumers may end up paying slightly higher prices for out-of-state online and catalog purchases. But that slight boost may help level the field a bit more for struggling brick-and-mortar retailers, and maybe help to keep a local tennis presence in your community.
See all articles by Peter Francesconi
About the Author
Peter Francesconi is editorial director of RSI magazine.