The Marketplace Fairness Act is a giant step forward in addressing the inequities caused by a state's inability to collect sales/use tax from online retailers. This blog post will discuss these inequities. (Note: "troubling condition" is conceptualized as states inability to collect sales/use tax from online retailers) (Note2: Refer to yesterday's post to understand why states are unable to collect sales/use tax from online retailers) (Note3: keep in mind, the Marketplace Fairness Act will not unduly burden online retailers, and there will NOT be double taxation; a future blog post will address this)
In the vast majority of states, sales and use tax makes-up a large percentage of the states’ total annual revenue. This claim is evidenced by the most recent statistics related to states’ taxation schemes. In 2010, nearly thirty-two percent (32%) of nationwide state tax revenue was derived from sales tax alone. Additionally, individual states that have a sales tax, make between twelve and a half percent (12.5%) and fifty-nine point six percent (59.6%) of their annual revenue by way of such taxation.  Therefore, it is fairly apparent that states rely on the collection of sales and use tax to function and provide essential services to their residence.
Despite the importance of sales and use tax upon states’ budgets, many, if not most, online retailers are not currently collecting or remitting such taxes to the appropriate taxing authorities within the states.  The reason for this is simple: under the current law, these online retailers are not required to do so. That being said, it is time to hold these retailers accountable for the protections that they are afforded by states in which they clearly do businesswithin, but refuse to contribute to. Furthermore, it is time to level the playing field for “brick-and-mortar” retailers that suffer at the hands of unjust tax holidays for online retailers created by illogical Supreme Court decisions.
Due to the inaction of online retailers, states lose out on a large portion of their potential tax base. According to a recent Chicago Tribune article, “the Illinois Department of Revenue estimates it misses out on $153 million to $170 million in uncollected sales taxes each year from online purchases.” Additionally, Public Sector Consultants, a Michigan based research and program management firm, recently published a report which estimates that Michigan will lose $141.5 million in 2012 revenue due to uncollected sales tax from online retailers. Furthermore, a study performed by the University of Cincinnati Economics Center shows that Ohio lost $200 million dollars in potential sales tax revenue last year alone. In a broader scope, it is estimated that nationally the overall effect of the troubling condition will be in excess of $11.4 billion dollars on state tax bases in 2012 alone. These examples are by no means an exhaustive list of the negative economic effects on the states caused by online retailers’ refusal to collect and remit sales and use taxes.
These statistics are very telling of the fiscal impact of the troubling condition on the states, especially in light of the financial problems that many states are having in these difficult economic times. According to a recent report published by the Center on Budget and Policy Priorities, a nonprofit governmental think tank, the United States’ financial crisis is far from over. That is, “[s]tate budget estimates for the upcoming fiscal year shows that states still face a long and uncertain recovery.” The report also explains that although budgets began to grow in 2011, they are still far from where they were prior to the “Great Recession:” ”The Great Recession that started in 2007 caused the largest collapse in state revenues on record. Since bottoming out in 2010, revenues have begun to grow again, but states are still far from fully recovered. As of the fourth quarter of 2011, state revenues remained 7 percent below pre-recession levels, and are not growing fast enough to recover fully soon.”
The report goes on to describe that while the states’ budgets are not at a comfortable level to run their governments effectively, the costs associated with doing so are on the incline: “Meanwhile, states' education and health care obligations continue to grow. Next year, states expect to educate 350,000 more K-12 students and 1.7 million more public college and university students in the upcoming school year than in 2007-08.
And some 5.6 million more people are projected to be eligible for subsidized health insurance through Medicaid in 2012 than were enrolled in 2008, as employers have cancelled their coverage and people have lost jobs and wages.”
The fiscal realities expressed by this report compounds the effect of the troubling condition on states ability to balance their budgets. When a state is unable to balance their budget, many of the services provided by that state must be curtailed. For example, tax revenue is used to fund schools, hospitals, and social and emergency services – when a state cannot produce enough revenue to fund these services, cuts are required. In addition, state tax revenue funds a state’s judiciary which online retailers can utilize to litigate contract claims arising from business interactions within the state. Therefore, online retailers are availing themselves to the benefits of taxation without being burdened by the costs. The troubling condition creates both a practical and equitable problem when viewed through the lens of state tax base implications.
Another adverse effect caused by online retailers’ refusal to collect and remit sales and use tax is that it creates an unfair advantage in favor of such retailers when compared with traditional “brick-and-mortar” retailers. Knight Kiplinger, the Editor in Chief of Kiplinger Publications, makes a very valid point regarding the taxation of online retailers by stating “[t]o me, the fundamental principle of ethical taxation is equal treatment of similar transactions.” The preceding quote is meant to illustrate a basic concept of taxation, which is: taxes should be equitable. This, however, is not the case when comparing online retailers to businesses with tangible storefronts.
It is estimated that online retailers receive a four to nine percent (4-9%) advantage over traditional “brick-and-mortar” businesses; this is an extremely large competitive advantage in the retail market. Much like the states’ recent financial problems, small, medium, and even large businesses have been in growing financial distress. The disadvantage of having to remit sales taxes is bankrupting some business. This problem is exacerbated by the fact that “brick-and-mortar” businesses have the added overhead of maintaining salespeople, physical structures, and other expenses associated with having a retail store. Further, many retail buyers take advantage of “brick-and-mortar” retailers’ physical presence by utilizing their salespeople to obtain information about products and testing the products in store, then ordering the products online to take advantage of the price differential caused by the troubling condition -- an occurrence known as: “show rooming.”
A third adverse effect of the troubling condition is: it causes unnecessary political strife. When proponents and politicians in favor of holding online retailers accountable for tax collection advocate as such, they are often met with criticism. At the heart of this criticism is usually the argument that the proponents are trying to increase taxes. This is an entirely unfair criticism because the tax that is sought to be collected is already owed to the taxing authority by way of a state’s use tax statute. However, political actors who are opposed to any tax increases, misrepresent the equitable treatment of taxation as just another tax hike.
A final adverse consequence of the troubling condition is “[i]t makes a regressive tax even more regressive.” In a recent article published by the Institute for Local Self-Reliance, this prior assertion is supported by the following: “because only those with internet access, a credit card, and a home or workplace where they can accept daytime deliveries are able to take advantage of the tax exemption.” An anecdotal example of this is: a working single mother of three who is subsidized by the state, will not be able to make purchases free from taxation because she cannot afford internet access or a computer and has to work at Burger King during the day; meanwhile, a wealthy businessman can, with the click of a mouse, purchase a tax free five thousand dollar ($5,000) stereo system.
Since states are allowed to implement taxation structures however they deem fit, residents of certain states that have high sales and use tax rates are affected more by a regressive-plus tax than residents of states with low rates or no sales tax at all. Regressive taxes are not ideal, especially in the United States which generally strives to have fair taxation. A general principle of American taxation is that the people that have greater resources should provide a higher rate of governmental sustenance. This is impractical in the context of sales tax because it would be all but impossible to levy a sales tax on every single purchase based on the purchaser’s economic means. However, when a regressive tax is required, such as with a sales tax, the taxing authority should make reasonable efforts to mitigate the negative impact of such a tax – this is not the case in the context of the troubling condition.
The reason that big online retailers posit for why they refuse to collect use tax for states is that it is too difficult and that the administrative costs would be too high. This explanation, however, does not carry much weight. In actuality, these companies have been given free software to do the collection work for them. This free software was given to these online retailers by the Streamlined Sales Tax Project, and the software calculates the exact amount owed to each state under that state’s taxing regime. The software tracks in what state each sale has been made by the online retailer, and the amount that should be charged to the consumer. Also, Amazon, the world’s largest online retailer, already collects tax, and has so for several years, for most states when the company collects taxes for Macy's and Target, which uses Amazon as their online retailer. Additionally, there are several different companies which specialize in state tax collection in compliance with the laws of each state; Netflix, who currently collects taxes in every state, uses these companies at a minimal cost. Furthermore, many online retailers, have been collecting such taxes for several states for the past few years.
The reason why these companies have been collecting such taxes for certain states, and not others, is because several states have passed legislation requiring them to do so (affiliate taxes). It is important to recognize that the individualized actions taken by the states are not a long-term or equitable solution to the troubling condition. Instead, federal legislation, such as the Marketplace Fairness Act, is required if states are to efficiently and effectively collect sales and use tax from online retailers.
 See Federation of Tax Administrators, 2010 State Tax Collection by Source (2011), http://www.taxadmin.org/fta/ rate/10taxdis.html.
 The year 2010 provides the most recent statistics related to States’ tax bases. Id.
 These statistics are limited to sales tax alone, and do not account for use tax collection. I was unable to collect data related to use tax, this may be because use tax collect is very rare due to individual’s lack of self-reporting.
 Id.; Accord Michael R. Gordon, Up the Amazon Without a Paddle: Examining Sales Taxes, Entity Isolation, and the "Affiliate Tax", 11 N.C. J.L. & Tech. 299, 315 (2010) (using a similar analysis of statistics for a related issue).
 See generally Donald Bruce, et al., University of Tennessee, State and Local Government Sales Tax Revenue Losses from Electronic Commerce (Apr. 13, 2009), http://cber.utk.edu/ecomm/ecom0409.pdf.
 This is the troubling condition. For purposes of this paper, when the term “troubling condition” is used, it is referring to: online retailers’ refusal to collect and remit sales or use taxes.
 Sandra M. Jones, Illinois Enacts Internet Sales Tax Law, Chi. Trib., Mar. 10, 2011, available at http://artic les.chicagotribune.com/2011-03-10/business/ct-biz-0311-amazon-tax-bill-20110310_1_amazon-and-overstock-main-street-fairness-act-sales-tax.
 Public Sector Consultants, Michigan Sales Tax Collection and the Internet: A Need for Fairness (July 2011),available at http://www.pscinc.com/LinkClick.aspx?fileticket=5JNb0oN3m3M%3d&tabid=65.
 WTAM 1100 News Radio, Clear Channel, Study: Ohio is Losing Nearly All Sales Tax From Internet Sales (Oct. 18, 2011), http://www.wtam.com/cc-common/news/sections/newsarticle.html?feed=122520&article=9272831.
 Jason Knott, CE Pro, Internet Sales Tax: Why You Will Benefit (Apr. 4, 2012), http://www.cepro.c om/article/internet_sales_tax_why_youll_benefit/ (estimating that in 2012 the overall effect on all of the states will be $11.4 billion)
 See, e.g., AP/WOAK, CBS, E-Commerce Tax to Target Out-of-State Retailers (Apr. 1, 2012), http://atlanta.cbsloca l.com/2012/04/01/e-commerce-tax-to-target-out-of-state-retailers/ (estimating that Georgia will lose out on $410 million in 2012); Nancy Mantell, et. al., Edward J. Bloustein School of Planning and Public Policy, Rutgers University,Estimates of New Jersey Sales and Use Tax Losses Resulting from E-Commerce 12-15 (May 2011), available athttp://www.policy.rutgers.edu/reports/other/NJRMA_Final_Report_May_2011.pdf (estimating the effect on New Jersey in 2009 was between $52 and $172 million).
 Elizabeth McNichol, et al., Center on Budget and Policy Priorities, States Continue to Feel Recession’s Impact(Mar. 21, 2012), http://www.cbpp.org/cms/index.cfm?fa=view&id=711#_ftn1.
 See generally Kirk J. Stark, The Federal Role in State Tax Reform, 30 Va. Tax Rev. 407, 417-422 (2010).
 See generally William Smith, Center on Budget and Policy Priorities, Policy Basics: Where Do Our State Tax Dollars Go? (Mar. 28, 2012), http://www.cbpp.org/cms/index.cfm?fa=view&id=2783; Leo P. Martinez, Tax Policy, Rational Actors, and Other Myths, 40 Loy. U. Chi. L. J. 297, 301 (2009).
 See, e.g., Division of the Budget, New York State, New York State Unified Court System Budget (2012), http://publications.budget.ny.gov/eBudget1213/agencyPresentations/appropData/Judiciary.html.
 The practical problem that the troubling condition creates is the actual amount of money that is lost by online retailers unwillingness to remit taxes. Further, the budgeting cuts that must be make because of financial shortfalls.
 The equitable problem is that online retailers are using services provided at the expense of the taxpayer without actually contributing to the tax base.
 David H. Gershel, The Day of Reckoning: The Inevitable Application of State Sales Tax to Electronic Commerce, 14 Tul. J. Tech. & Intell. Prop. 335, 361 (2011).
 Knight Kiplinger, Kiplinger Publications, Should Online Retailers Collect Sales Taxes? (Sept. 2011), http://www.kip linger.com/columns/ethics/archives/should-online-retailers-collect-sales-taxes.html.
 Independent Businesses, Institute for Local Self-Reliance, Internet Sales Tax Fairness (May 23, 2011), http://www .ilsr.org/rule/internet-sales-tax-fairness/.
 See generally On Techies Blog, Brick and Mortar vs. Online Retailers, a Decade Later (Jan. 31, 2012), www.onte chies.com/2012/01/31/brick-and-mortar-vs-online-retailers-a-decade-later/.
 Rhonda Abrams, ABC News, Small Business Strategies: Retail's Changing; So Should You (Feb. 17, 2012), http://abcnews.go .com/Business/small-business-strategies-retails-changing/story?id=15706425#.T6buncW7nyU.
 See, e.g., Siobhan Hughes, Washington Wire, Retailers Push GOP on Online Sales Tax (May 25, 2012), www.blogs.wsj.com/washwire/2012/05/25/retailers-push-gop-on-online-sales-tax/.
 See generally Alice Hines, The Huffington Post Online, Internet Sales Tax: Democrats, Republicans Support Closing Loophole (Dec. 1, 2011), http://www.huffingtonpost.com/2011/12/01/internet-sales-tax-bill_n_1123024.html.
 The Institute For Local Self-Reliance, Internet Sales Fairness Act (May 23, 2011), http://www.ilsr.org/rule/interne t-sales-tax-fairness/.
 See Susan Pace Hamil, The Vast Injustice Perpetuated by State and Local Tax Policy, 37 Hofstra L. Rev. 117 (2008).
 See generally Thomas Piketty & Emmanuel Saez, How Progressive is the U.S. Federal Tax System? A Historical and International Perspective (2007), http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf.
 Randell Stross, Sorry, Shoppers, but Why Can’t Amazon Collect More Tax?, N.Y. Times, Dec. 27, 2009, at BU3,available at http://www.nytimes.com/2009/12/27/business/27digi.html.
 Michael Mazerov, Center on Budget & Policy Priorities, Amazon’s Arguments Against Collecting Sales Taxes Do Not Withstand Scrutiny 5 (Nov. 16, 2009), http://www.cbpp.org/files/11-16-09sfp.pdf.
 See Streamlined Sales Tax Project, Streamlined Sales Tax Registration (2012), http://www.sstregister.org/sellers/ entry.aspx
 Michael R. Gordon, Up the Amazon Without a Paddle: Examining Sales Taxes, Entity Isolation, and the "Affiliate Tax", 11 N.C. J.L. & Tech. 299, 315 (2010).
 Id.; In reality, using companies such as these does not cost a corporation any profit because the expenses incurred can be deducted dollar-for-dollar from the corporation’s federal, and in most cases, state income tax/corporate tax returns.
 See David H. Gershel, The Day of Reckoning: The Inevitable Application of State Sales Tax to Electronic Commerce, 14 Tul. J. Tech. & Intell. Prop. 335, 355 (2011).
 See, e.g., S. 1452, 112th Cong. (2011).