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Gardner:Cyber Monday is bad biz for states

Photo Credit: Photo by Donna Grethen

Matthew Gardner is executive director of the Institute on Taxation and Economic Policy, a nonprofit, nonpartisan research organization in Washington.

With the holiday season now in full swing, why are so many Main Street retailers down in the dumps? The reason is Cyber Monday, and if this year follows recent trends, it will go down as the biggest online shopping day in the history of the Internet.

The Monday after Thanksgiving is the electronic equivalent of the Black Friday shopping bonanza -- minus the throngs of mall shoppers hunting for holiday bargains. And while online shoppers sitting at work at their desks don't draw news cameras like mayhem at the malls, the impact of online retail on our communities is a story worth telling.

Last year, Americans spent more than $1 billion shopping online on Cyber Monday. The National Retail Federation predicts this holiday season, 36 percent of all purchases will be made online. But too many of these purchases will be tax-free, due to an unfortunate loophole allowing e-retailers to shirk their role in helping states collect sales taxes -- which cost states $10 billion last year alone, according to researchers at the University of Tennessee.

More tax-free sales mean fewer tax dollars for states -- not to mention the consumer dollars that won't circulate in our local economies because the current system rewards online shopping with out-of-state businesses.

What is this loophole? In 1992, the Supreme Court ruled that states could not force a retailer to collect sales taxes unless that retailer had a store, warehouse or other "physical presence" within the state. At that time, it was a ruling about catalog and other "remote sellers" who, the court decided, shouldn't have to navigate the often complex tangle of state and local sales tax systems.

But technological changes since 1992 make the court's decision far more consequential than they could have imagined. Three years after this decision, opened for business and online shopping has exploded since then. At the same time, the court's fears about tax complexity are obsolete, since computer software now makes it easy for remote retailers to calculate and collect state sales taxes nationwide.

To be clear, the problem is not that e-retailers are dodging taxes, it's that they aren't collecting them from consumers. While every state legally requires shoppers to pay sales taxes directly to the government when retailers fail to collect it, these laws are hopelessly unenforceable as sales taxes were never intended to be paid by individuals.

Those uncollected taxes add up. The losses are growing every year and the cumulative results are staggering. New York is facing sales tax revenue losses in excess of $700 million in 2011. Every one of those uncollected sales tax dollars is a dollar not spent on public safety or education, and a dollar price advantage we are giving to online retailers but denying to businesses in our own towns.

In an effort to regain those lost dollars, individual states are beginning to strike ad hoc deals with some online retailers, but the process is burdensome to states and lets too many other companies off the hook.

The good news is that Congress is looking at legislation that would finally allow states to compel online retailers to comply with their sales tax collection laws, so long as those states simplify their sales tax systems and exempt very small businesses. The bad news is, the current Congress is about as gridlocked as the parking lot at your local shopping mall was on Black Friday.

But there is reason for hope. Traditional retailers with big pocketbooks, like Target and Home Depot, have finally grown tired of watching their online competitors exploit the no-tax loophole and are making their voices heard in Washington. If these brick and mortar titans succeed, they will, in the process, help level the playing field for small local business and restore the public resources we all depend on.