Debate Club

Not Taxing Internet Retailers Harms Local Economies

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If your state sales tax covers a certain item when bought in a store, you're legally required to pay the same tax directly to your state when you buy it over the Internet. But few consumers do that, and most Internet retailers don't charge the tax in most states because the Supreme Court has said they don't have to if they don't have a store or other "physical presence" in a state.

[See a collection of political cartoons on the economy.]

States' inability to require out-of-state Internet retailers to live by the same rules that apply to local, family-run businesses is patently unfair. It also imposes costs that many people might not recognize:

  • It slows local economies and costs jobs. Sales taxes typically range from 5 to 10 percent, so local businesses—which have to charge sales taxes—start out at a 5 to 10 percent price disadvantage compared to Internet retailers that don't collect taxes.
    When local stores lose sales to Internet retailers, the least that happens is that they don't hire as many people as they would if their sales were higher; at worst, they go out of business. In both cases the damage ripples through the local economy, as lower employment for the bookseller or clothes boutique translates into lower sales for the local restaurant and dry cleaner.
  • It weakens public services. Each year, about $11 billion in tax on Internet sales goes uncollected. That's $11 billion that states and localities don't have to support schools and hospitals, pay and equip police, build and repair roads, and provide the many other services that all residents use. And, as online shopping continues to grow in coming years, so too will the revenue losses.
  • It shifts more taxes to those who can least afford them. Even apart from the Internet sales tax issue, poorer families pay a larger share of their income in sales taxes than better-off families do because they have to spend almost everything they earn. Tax-free Internet shopping compounds the problem: Many low-income families would love to shop online to avoid sales tax but can't because they don't own a computer or can't afford high-speed Internet access.

[Read the U.S. News debate: Is a Flat Tax a Good Idea?]

Leveling the playing field between Main Street and Internet businesses is the right thing to do—for all of us.

Michael Mazerov

About Michael Mazerov Senior Fellow at the Center on Budget and Policy Priorities.

Tags
sales tax
internet
shopping
business

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