May 26, 2013 in Opinion

Loss of revenue hurting state, local governments’ provision of basic services

Carol Nelson
 

It’s time for the U.S. House of Representatives to follow the U.S. Senate’s lead and pass legislation that will level the playing field between online and traditional retailers while halting an alarming erosion of our state and local governments’ sales tax base.

The Marketplace Fairness Act (Senate Bill 743) would require large online retailers (who gross more than $1 million annually in online and mail order sales) to collect and remit sales tax on sales to customers in Washington and other participating states even if the retailers are not physically present in those states.

In 1992, the U.S. Supreme Court ruled that only Congress can require retailers without a presence in a state to collect and remit sales tax on sales into that state. That has been the case since the court’s Quill v. North Dakota decision that exempted out-of-state retailers from collection responsibilities.

That decision may have made some sense two decades ago, before the Internet became the retail sales juggernaut it is today. In 1992, interstate sales were done only by mail order, and the court reasoned that it was too burdensome on these remote sellers to comply with the sales tax collection requirements of multiple states.

Unfortunately for in-state retailers, the Quill decision created a huge loophole that gives remote sellers a big competitive advantage. Entrepreneurs realized they could sell to customers in states where they had no stores or warehouses and avoid collecting sales tax that in-state merchants had to collect. While purchasers of these items owed an equivalent use tax when sales tax wasn’t charged, few voluntarily paid it and enforcement was impractical.

The rise of the Internet kicked this strategy into high gear. Today’s strong growth of online retailing has hurt the malls and main streets of many cities, as evidenced by empty storefronts. While e-commerce has been and will remain an essential component of Washington’s economy, it’s simply unfair to give out-of-state retailers a competitive advantage over Washington businesses. They all should compete on product, price and service, not on the ability of one form of retailer to avoid charging sales tax.

While online commerce has continued to grow astronomically, the number of retailers operating in Washington has declined 12.3 percent over the past decade despite a 12.5 percent increase in the state population. Moreover, the gross income of retailers declined to 17.7 percent of all business income in 2012 from 22.8 percent in 2002. And retail trade sales (excluding car dealers) declined from 14 percent of personal income in 2002 to 12.5 percent in 2012. These are alarming trends for the health of our retail base.

The damage goes beyond failing local retailers. State and city services suffer too. Washington is particularly affected by lost sales tax revenue because it lacks an income tax and so relies more heavily on sales taxes to fund essential services such as schools, public transportation and police.

The Department of Revenue estimates that state and local governments will lose nearly $1.1 billion during the current 2013-15 biennium, with the loss rising to $1.5 billion by 2017-19 as remote sales continue to outpace brick-and-mortar sales. This loss of tax revenue may lead to reductions in services and fewer investments in Washington’s infrastructure. Local government losses statewide comprise $415 million of the total $1.5 billion loss in 2017-19. In Spokane County, local governments stand to gain nearly $9 million in sales tax revenue annually by 2017 if the MFA is enacted.

The facts don’t lie. Here in Washington, we’ve found out the hard way that being able to buy “tax-free” on the Internet is no bargain. In fact, it comes at a tremendous cost to our local retailers and neighborhood services. Please urge your House representative to stand up for Washington by supporting the Marketplace Fairness Act.

Carol Nelson is director of the Washington State Department of Revenue.

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