Let's be fair to in-state retailers

Holley Ulbrich
Guest columnist
Holley Ulbrich


Mall and Main Street retailers are struggling to maintain their market share in the face of online competition. Online retailers have an advantage given by court decisions in 1967 and 1992 that limit their obligation to collect state and local sales taxes.  Back in 1992, in the Quill v. North Dakota case, the Supreme Court threw the issue back to Congress to act under the interstate commerce clause to rectify this problem.  Twenty-five years later, we are starting to see some movement.  A US Senate bill (S. 18) would remove this protection from on-line retailers, with an exemption for smaller retailers because of the cost of compliance.

The tax advantage for out-of-state (not just online) sellers is costing state and local governments a big chunk of sales tax revenue, because sales taxes are the largest single revenue source for state in many places. The estimated revenue losses to states are staggering. A University of Tennessee study estimated total remote sales tax losses by states at $23.26 billion for 2012, with $11.39 billion of those losses coming from electronic sales.   In South Carolina, sales tax generates about 36 percent of state tax revenue.  In 30 counties, local option sales taxes also an important revenue source.

But sales tax revenue to state and local governments is not the only issue. The other questions are about fairness.  The present situation creates an unfair a competitive disadvantage for those retailers who do have to collect the tax.  Retailers with an in-state presence are required to collect sales tax, so you will see in on your receipt from WalMart, amazon.com, Target, and Barnes and Noble. (Amazon had a five-year break for establishing a distribution plan, but is now collecting South Carolina sales tax.) But many online sellers with no physical presence in the state do not have to collect sales tax.

On-line sellers note that they have shipping costs, but those refrigerators, books, sweaters and bicycles had to get to the retailer somehow, and that shipping was included in the wholesale cost. Software makes it pretty easy to collect and remit sales tax, whether you are a Main Street chocolate shop or an on-line seller of chocolate.  The other argument made by online sellers is that brick and mortar stores create costs for governments in requiring services like fire and police protection.  But the sales tax falls almost entirely on the buyer, not the seller, in the form of a higher price including tax.  The buyer lives in the state that gets the tax revenue and provides the services. If we want newer school buses, better roads, and affordable high education in South Carolina, the government has to have some revenue to pay for those things.

Finally, the sales tax is generally more burdensome on the poor. It’s regressive.  But the poor are much less likely to shop on-line and avoid the tax than the middle and upper income people with their home computers, tablets and iPhones and a wallet full of credit cards.  So expanding the base of the tax to include more on-line purchase will actually make the sales tax just a shade less regressive.

Treating on-line and brick and mortar stores the same when it comes to sales tax is not just a question of revenue, although the state could use that boost to pay for some pretty urgent needs.  It’s also a question of fairness—of leveling the playing field between local merchants and online retailers, and between the less affluent who don’t have easy access to online purchases and the middle and upper income shoppers who do.   Twenty-five years is far too long.  Congress should act now.

Holley Ulbrich is a retired Alumni Distinguished Professor of Economics at Clemson University, specializing in state and local public finance.