Imagine you are a benevolent monarch and you have the power to institute a sales tax. (Even benevolent government has to be financed, after all.) Would you set one up that gave preference to sellers located outside your kingdom and penalized your own subjects? Would you go further and discourage those outsiders from even setting up shop in your country?
Of course you wouldn't. That would be crazy. And while there are plenty of examples of insane heads of state, they aren't usually beloved by their people. Revolts happen, too.
Yet that, in a nutshell, is where we stand these days with the sale of goods over the Internet. What started out as a novelty that states could allow to operate tax-free (remember when Amazon was a river?) is now a major economic force that ought to be treated the same as traditional brick-and-mortar retailers.
The decision this week by the U.S. Senate to open debate on legislation that would end what amounts to tax-free online shopping is encouraging. Make no mistake, this is not a partisan issue but one of fairness. Plenty of Republican governors would like to see an end to this tax dilemma, and Monday's procedural vote was a bipartisan 74-20.
Maryland has a significant stake in this decision, partly because it was wrapped up in the General Assembly's recently approved gas tax legislation. The state's estimated $173 million annual take from taxing Internet sales is set aside for upgrading roads, public transit and other transportation projects. Should Washington fail to take action, the gas tax will take its place — with an expected 7-cent increase in 2016.
But while paying 7 cents less per gallon at the pump in a few years may sound attractive, that's not the real reason Maryland residents should support the Senate proposal. What should get their dander up is how local taxpayers are essentially subsidizing companies that have no presence whatsoever in the state.
Under a 1992 Supreme Court ruling, states can't force a retailer to collect a sales tax unless it has a physical presence in the state. So, weirdly enough, that gives Internet companies an incentive not to locate a store or warehouse in Maryland whenever possible.
In other words, the current sales tax system not only hurts those retailers who actually set up shop inside Maryland's borders by making their goods 6 percent more expensive, but it actively discourages Internet companies from coming here. If that doesn't sound like something out of the "Madness of King George," we don't know what does.
Naturally, some conservatives are calling the Senate bill — the aptly titled Marketplace Fairness Act — a tax increase. But that's the sort of logic that ought to earn them a visit from the Semantics Police. It's not creating any new or increasing any existing tax; it's just closing an unfair and irrational exemption. After all, consumers are actually supposed to pay the sales tax on Internet purchases (if they live in the District of Columbia or the 45 states with a sales tax), but few do because the system relies on self-reporting.
Now, we will grant that this obligation carries some burden for those companies that sell online. There are tremendous variations in the sales tax — in what items are taxed and how much — that not only differ among states but often by county, city or town.
That's why it's probably not unreasonable to continue to grant a tax exemption to the mom-and-pop retailers with less than $1 million in Internet sales. Larger companies are more likely capable of assuming that burden — or at least hiring a third-party operator like Amazon to handle the calculations, paperwork and payments.
Even if it passes the Senate (as most expect it will next month), the legislation is likely to run into trouble in the House, where tea party sensibilities hold sway. Yet even there, those who usually oppose increasing tax revenue of any variety, state or federal, may want to think twice in this instance. The proposal has widespread support in the business community, and should it fail, states may be forced to raise other taxes — and less desirable ones like the property tax at that — to offset the growing gap in sales tax collections.
That's not to suggest we relish paying more for online shopping, but we do embrace the possibility of a much more level playing field for entrepreneurs. The current one is unhelpful to the economy, to job creation and to keeping the burden of taxes as broad (and modest) as possible while meeting the obligations of government.Copyright © 2015, CT Now