It's Not Fair

By Bill McClellan

A word to the wise--anytime you see something that applies to you containing the words "tax," "fair" and "simple," run for the hills!

Recently, a sub-committee in the U.S. House of Representatives heard testimony on a proposed piece of legislation that would force electronic retailers to collect sales tax on remote Internet and television sales. The proposal has been deceptively named the "Sales Tax Fairness and Simplification Act" in an attempt to gain passage.

During the hearing, those pushing this legislation painted a picture of "Main Street" America going bust because of the Internet. I'm not joking; that was the message. It was surreal--like a time warp back to the pre-Netscape days of 1994 and the subsequent technological empowerment of those both large and small that is the Internet as we understand it today.

Here is the storyline that was sold at the hearing: local mom-and-pop retailers can't compete with out-of-town retailers who use catalogs, the Internet and television to reach local consumers. To ensure the survival of Main Street, the playing field must be leveled by requiring remote sellers to collect sales tax. During the hearing, multi-state big box retailer JCPenney championed this worthy cause for its smaller competitors, testifying that the current tax system puts "local businesses that provide jobs in the community at a competitive disadvantage."

I disagree. In fact, in my experience, the polar opposite is a more accurate depiction. The trials and tribulations of small mom-and-pop retailers on Main Street are well documented. It is the tale of large multi-state big box retailers geographically expanding throughout the nation, offering local communities unprecedented value on price and a wider selection of merchandise. Customers voted with their wallets and purses and the merchants of Main Street suffered. Many closed shop or entered new lines of business. Those who survived did so not by competing toe-to-toe with their larger competitors, but rather by specializing, finding niche products, and entering new markets. The tools they utilized to prosper and thrive? Mailing lists, catalogs, e-mail campaigns, websites, home shopping and other similar, non-geographic centered channels of distribution.

So if this is a fairness issue, let's talk about what's fair for small mom-and-pop retailers using electronic mediums to reach their customers. Two retailers in the same town, one a multi-state big box retailer, the other a Main Street merchant with a small storefront, a website and an e-mail list of customers from around the nation. Currently, each is responsible for collecting and remitting sales tax for those customers who physically visit their stores. Under the proposed changes, small mom-and-pop e-retailers would be forced to begin computing, collecting and remitting taxes in each jurisdiction in which it has a customer. Let me translate. When a small e-retailer picks up a new customer in another locality--for discussion sake let's say Anchorage, Alaska--the new burden would be to compute, collect and remit tax for all applicable taxing entities, including school districts, transportation districts, sports arena districts, etc. This burden is not one shared by its large multi-state competitor with a physical location in the state of Alaska who is only required to collect and remit at a single rate. Is that fair? Rinse and repeat across the 7,500 other taxing jurisdictions in the country and fairness is not really the issue at all. Rather, a significant barrier to e-commerce for those without physical locations throughout the country would be erected, tilting the playing field dramatically in favor of the traditional big box brick-and-mortar retailing model.

Similarly, is it fair to expect a small mom-and-pop, out-of-state electronic retailer to collect a tax that is then used to benefit larger multi-state competitors through a wide variety of state and local government services and programs (including tax incentives) for which the out-of-state retailer receives no benefit? No. The fact is that for decades, smaller Main Street retailers have lost sales to suburban shopping malls and large brick-and-mortar stores. In droves, the local entrepreneurs have turned to online sales as their best hope to supplement their sales and fend off the big-box competition. For local retailers using the web as an alternative revenue stream, the tax issue has not been one of fairness, but one of survival. A change in sales-tax regulation would be more expensive and complicated than most local businesses could handle.

Today, mom-and-pop and other local entrepreneurs have learned not only to survive, but have become sources of innovation that impact all marketing channels and methods. I have watched these e-retailers grow their businesses across multiple channels, fighting back against big stores with big marketing budgets. To create legislation that discriminates against them is short-sighted for the retail community as a whole.

Notable Streamlined Sales Tax Dates
1967	1992	2000	2007
U.S. Supreme Court National Bellas Hess decision determines that the interstate commerce clause of the Constitution bars a state from compelling an out-of state retailer from collecting taxes on sales to its residents.	U.S. Supreme Court Quill decision determines that remote retailers cannot be compelled to collect and remit sales tax to states because of the complexity of doing so.	Streamlined Sales Tax Project (SSTP) is formed to minimize the many differences between the sales tax policies and practices of the 50 states.	House Judiciary Law Sub-Committee holds hearing on H.R. 3396 "Sales Tax Fairness and Simplification Act." States report progress with 22 states participating in the project representing less than 30 percent of the U.S. population.

Bill McClellan is vice president of government affairs at ERA. He can be reached at (703) 908-1032, or via e-mail at bmcclellan@retailing.org.