The old adage, if something’s too good to be true, it probably is, too often applies to bargain-basement prices for retail goods online. An often ignored loophole in existing sales tax law is giving online retailers an unfair advantage over traditional brick-and-mortar stores, forcing thousands of local stores across the U.S. to close, and tens of thousands of Americans to lose their jobs.
Mom-and-pop retailers aren't the only businesses suffering from this trend.
In recent weeks, major retailers have announced a rash of layoffs and store closings across the country. This means local governments will continue to lose tax revenue needed for services like police, fire departments and public schools.
Congress must act to stop the bleeding, protect jobs and ensure local tax revenues are paid. This is about creating a level playing field for all businesses, whether online or traditional brick-and-mortar stores.
A scan of recent headlines paints a dismal picture:
- Sears has shut down 300 stores since 2010, and is on track to close at least 33 more.
- Radio Shack is preparing to close 500 stores.
- Target has announced it will cut 475 jobs, and won’t fill 700 open positions. And Brookstone is contemplating bankruptcy.
A recent ShopperTrak report found brick-and-mortar retailer traffic in 2013 to be barely half of what it was in 2011, while online holiday sales volume doubled in 2013.
Online stores’ unfair sales tax advantage is playing a huge part in this ongoing and troubling trend.
Under current sales tax law, online retailers are not required to collect taxes on purchases made by people living outside the state where the business has physical locations. Instead, in states that have sales taxes, customers are supposed to track all their online purchases and pay a “use tax” when they file their taxes at the end of the year.
Most people don’t even know about this law, so almost no one pays. In fact, fewer than 2 percent of consumers report and pay use taxes on their purchases from out-of-state Internet retailers.
This leaves consumers vulnerable to arbitrary enforcement by state tax officials, and translates into an estimated $23 billion in lost revenue for states.
The innovation of online shopping has transformed the way we live our lives, and we all benefit from it. But even disruptive innovation has to be fair.
Consumers have made it clear they still appreciate the convenience and service of shopping in local stores. So it’s important that online stores and Main Street stores be given a level playing field on which to compete.
Online stores have an unfair advantage, because they don’t have to charge their customers state sales tax. Moreover, they’re already paying less to maintain their businesses, as brick-and-mortar retailers have to pay for buildings, sales people and all the other costs of occupying a specific physical location.
Internet retailers can be located anywhere and do not have all the costs associated with a physical presence in communities. Add a sales tax advantage of up to 10 percent, and the future of brick-and-mortar retailers and shopping centers is going to be very gloomy—unless Congress intervenes to close the loophole.
Lawmakers are working to solve this problem, but it has been a long, slow process.
Last spring, the Senate passed the bipartisan Marketplace Fairness Act, which would ensure that online retailers collect taxes on purchases made by customers who live in different states. But the bill has stalled in committee in the House.
Now, the House is considering proposals that would require Internet retailers to use software programs similar to those used by national retailers with Internet sites to determine, assess and pass along consumer tax payments as part of the Internet purchase.
We need a solution that keeps the playing field level between brick-and-mortar stores and online retailers, allowing for fair competition. In short, House lawmakers need to take action in 2014 to protect American jobs and funding for local services.
The situation in our country is critical, as stores close every day, Americans lose their jobs and communities go without the revenue needed for essential services.
Americans value and support their local communities and will not punish their representatives who show the political courage to do what they know is right. This is bipartisan, fair and sensible.
Real competition means everyone playing by the same rules, and that means online retailers, too.
It is time for the House to act and change the unfair advantage given to Internet sellers.
Gary Shapiro is president and CEO of the Consumer Electronics Association (CEA)®, the U.S. trade association representing more than 2,000 consumer electronics companies. His latest book is "Ninja Innovation: The Ten Killer Strategies of the World's Most Successful Businesses," (William Morrow, January 2013). He is also author of the New York Times bestselling book, "The Comeback: How Innovation Will Restore the American Dream" Contact him on Twitter at @GaryShapiro.