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Who Pays for “Tax-Free” Online Retail?

Oct 1 2009

When Maple Street Children’s Bookshop announced its closing after nearly thirty years in business, owner Cindy Dike pointed to three forces that conspired against her continued success: the flagging economy; the opening of Borders Books on St. Charles Avenue; and a shift in consumer habits to online shopping.

Of the three, the least obvious and most pervasive threat of the three is internet retail. Consumers are drawn to the convenience and savings that tax-free online shopping provides, but don’t realize that their community pays for these savings in three significant ways.

First, low-income families carry an unfair tax burden since credit card and internet access, and therefore tax-free online retail, are most available to higher income brackets. Thus, the most regressive form of taxation becomes even more regressive.

Second, the community loses needed tax revenue to fund public services including police protection, healthcare, and schools. Internet retailers with no physical presence or “nexus” in a state are not required to collect sales taxes on purchases. In theory, consumers are required to keep track of their online purchases and then pay the appropriate amount owed in sales tax as “use tax” on their state tax return. In practice, this “fair use tax law” is nearly unenforceable. A 2009 University of Tennessee study estimated that uncollected sales taxes on e-commerce cost Louisiana $269 million in 2008 and predicts those losses will rise to $396 million by 2012.

Finally, exempting online retailers from collecting sales taxes puts bricks-and-mortar businesses at a competitive disadvantage. In Orleans and Jefferson parishes, where sales taxes approach ten percent, companies like Amazon, the nation’s 20th largest retailer, are granted, in effect, a nearly 10 percent price advantage over local businesses.

A consumer who buys a camera for $2699 at Lakeside Camera Photoworks, for example, will end up spending $2935 including taxes. Online, that same purchase will not entail paying sales tax, putting Lakeside at a $236 price disadvantage. Jefferson Parish and Louisiana lose out on $236 in taxes and Lakeside Camera will lose out on the sale. The $329 gross margin Lakeside would have made on the sale of that camera would have gone to training salespeople, and paying rent, utilities, advertising and other costs locally. Instead, it will enrich a different community. The out-of-state vendor’s gain is Lakeside Camera’s-and Jefferson Parish’s-loss.

It’s time that Louisiana level the playing field for all retailers. Other states have already taken steps in this direction. This year, North Carolina, Rhode Island, and New York passed laws requiring many large online retailers to collect sales taxes for purchases within their borders. (All three states exempt smaller online retailers.)

Meanwhile, 41 states and the District of Columbia have signed on to the Streamlined Sales Tax Project, a coordinated effort to align sales tax policies. The goal is to make sales tax rules so similar across states that it will be easy for large online retailers to collect taxes nationwide (which all national chains already do, using widely available software). With sales taxes more uniform nationally, theses states plan to call on Congress to pass the Main Street Fairness Act, which would make it possible to extend the requirement to collect sales taxes to all retailers with more than $5 million in annual sales.

Of the 45 states that have a sales tax, all but four have signed on to this multi-state initiative. Louisiana is one of the states that has not.

As we work to convince Louisiana lawmakers that our local businesses deserve a level playing field, it’s crucial that we remember that the money we “save” by shopping online is in fact no savings at all, but a drain on our region’s ability to create jobs, generate wealth, educate our children, and provide essential services.

Article by Dana Eness and David Guidry. Dana Eness is the executive director of The Urban Conservancy and can be reached at dana@staylocal.org. David Guidry is second-generation owner of Lakeside Camera Photoworks and can be reached at david@lakesidecamera.com.

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