With the rapid growth of Internet retail sales, two things have occurred that require an adjustment in our sales tax system.
First, bricks-and-mortar retailers in our hometowns, and in states large and small, are placed at a competitive price disadvantage. They have to add on a sales tax, then collect and remit it to the state, the Internet retailer doesn't, although the tax liability still exists.
That price difference, particularly on large-ticket items or in places with a high sales tax, drives purchase decisions. The very retailers who support our communities by paying taxes, hiring employees and providing local choices have to overcome the price advantage given to the remote retailer who does not support our community, does not hire our people and is not readily available to solve purchase problems.
Secondly, the sales tax system itself, which to date has been grudgingly accepted because it basically treats everyone the same, has become discriminatory. You now pay the sales tax depending on whether you made a purchase from a store or over the Internet.
None of us like to pay taxes. But we tolerate them as long as they are fair to all, because we know we need some public services. When tax systems are perceived as unfair, people try to find ways around them.
The current sales-tax system makes criminals of those who don't pay their “use tax” for online purchases when they file their state income tax returns. Every state with a sales tax has this alternative use tax: If the seller doesn’t collect a sales tax at the time of purchase, buyers have the obligation to report and remit the tax themselves. But few do.
These problems need to be corrected, both to provide the Main Street retailer with a level playing field, and to provide fairness in the sales tax system.
The Main Street Fairness Act filed by U.S. Sen. Dick Durbin, D-Ill., will correct these problems. It builds on the Streamlined Sales Tax Agreement, that now includes 24 states with uniform definitions of what's taxable, along with a single-point sales-tax remission system, and a simplified sales-tax code.
Through this agreement, these 24 states – and others that join in – are relieving the undue burden on interstate commerce which may have existed in the past.
The act provides that if a state adopts the Streamlined Sales Tax Agreement and helps build this national uniformity, the state may then require remote retailers to collect and remit the sales tax.
To help make it work, the Streamlined Sales Tax Governing Board has software to collect the tax for the online retailer and remit it to the state at no charge to the remote retailer. It insures that there are no extra costs to the online retailer for collecting the sales tax.
Obviously, more tax revenues will be collected by the states, since there has been tax avoidance under the current system. How those funds are used is up to the states. In Indiana, we hope to use the extra revenue to eliminate an outdated and unfair inheritance tax.
Most important is the need to establish equity for all retailers and to update the sales tax system so it is shared fairly by digital age consumers.
Luke Kenley is the Republican chairman of the Indiana Senate Committee on Appropriations and president of the Streamlined Sales Tax Governing Board, a coalition of 24 states that have agreed to simplify their sales tax systems.