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CNHI News Service Originals

October 24, 2011

E-commerce raises question of sales tax fairness

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NORMAL, Ill. —

And they are protected by a 1992 Supreme Court ruling that mandates retailers to collect and remit sales taxes only in those states where they have a physical presence such as a store or headquarters. The decision came about in a test case involving catalog sales but the principle was extended to Internet sales as e-commerce evolved.

Bricks-and-mortar stores, including big-box operators Walmart and Target, didn’t say much at first, but now they’re ratcheting up the pressure on politicians to close the sales tax loophole for online retailers, and close it in a hurry.

The Supreme Court left open the door for Congress to enact a national solution, but there had been little interest in doing so until revenue shortfall caused by the persistent recession had state and local governments hunting tax dollars wherever they can find them. The push for a remedy is also driven by the accelerated pace of e-commerce and its negative impact on Main Street businesses.

The U.S. Census Bureau, for example, projects online retail sales in the U.S. will hit the $200 billion mark in 2012, up from $135 billion in 2009. Online sales for the upcoming holiday season are expected to surpass last year’s record-breaking $32 billion.

Forty-five states and scores of municipalities levy sales taxes, with various exemptions for essentials such as food, clothing and medicine. Consumers in those jurisdictions are legally obliged to keep track of their tax-free online purchases, and account for the uncollected taxes when they submit their annual tax returns.

This honor system is called a “use tax” and few people pay attention to it. Nor do the states and municipalities do much to enforce it.

U.S. Sen. Dick Durbin, D-Ill., understands the competitive disadvantage faced by bricks-and-mortar stores. He also calls the loss of billions of bucks in sales tax revenue “real money” for cash-strapped states that have cut funding for schools, police, libraries, roads and social services.

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