Saturday, March 13, 2010

Who Pays When You Buy Tax-Free Online?

While economists nationwide argue over whether we have begun to recover from the Great Recession, one financial reality is beyond dispute. Our state is facing the biggest budget challenge in decades. Even in a slowly rebounding economy, Texas is faced with a projected mid-year budget shortfall of $10 billion. Without a state income tax, our sales tax revenues are a primary source of funding for public services.

The enormous irony in this troubling story is that Texas is allowing hundreds of millions of dollars in sales tax to go uncollected by allowing remote online retailers with a significant business presence in our state to ignore their obligation to collect sales tax.

Given the sums involved, you would think there would be many in the state calling for this situation to be remedied. There are not. Perhaps it's because opponents of sales tax equity have, so far, managed to obfuscate the issue through a combination of misinformation and scapegoating.

Under current sales tax law, any out-of-state retailer is required to collect and remit sales tax for purchases made by residents in Texas if the retailer has a physical presence in our state. Current sales tax laws dictate that an out-of-state retailer has a physical presence in a state if they have a store, warehouse, office, or sales agent in the state. and other online giants have thousands of affiliates in Texas, and they are actively promoting products sold by these out-of-state businesses. When this promotion results in a sale of said product, the affiliate earns a commission. That, by any definition, makes the affiliate a sales agent, and that means that these online mega-retailers have the legal presence in our state that requires them to collect sales tax.

The Amazons of the world and online affiliates are naturally opposed to any steps that states might take to enforce existing sales tax laws. Strategically, their stance makes a lot of sense because it gives them a significant competitive advantage over our in-state businesses that must add the additional cost of sales tax.

Furthermore, there is no doubt that consumers enjoy this so-called advantage. Many people will shop at out-of-state e-tailers just to avoid paying sales tax. That sounds fine, but we need to ask ourselves, in the long run, who really is footing the bill for these duty-free purchases?

Well, I can tell you who is not paying the bill: Neither online affiliates nor remote retailers. We are not talking about just a few dollars here and there flowing out-of-state. The reality is that hundreds of millions of dollars are lost each year, and the figure is growing.

This is money that should be going to first responders, to local communities, and to lessen our tax burden. Instead, this money is flying out-of-state to remote retailers and the affiliates that pocket the cash while taxpayers subsidize their use of our in-state services, our roads, and their very business.

Taking advantage of our state's unwillingness to enforce sales tax laws during the best of times is egregious enough. However, during a recession that has hit our state and local economy so hard, it's an affront to every business and citizen in the state. And what's worse, on an economic level, it makes no sense.

Legislators who oppose sales tax equity tout their belief in fiscal responsibility. But, in truth, how fiscally responsible is it to maintain a public policy that subsidizes out-of-state retailers while punishing in-state, tax-paying businesses and residents? Does fiscal responsibility demand that our state government burden residents and businesses with higher taxes and fewer services to placate out-of-state retailers that only take from our state and provide nothing in return? Yet that's the stance our state legislators and Governor are currently taking.

And so I ask one more question: How's that working out for us exactly? The current budget shortfall tells me the answer is not so good. Opponents also love to argue that folks like me are calling for a new tax. The idea that any struggling retailer in our state would demand a new tax on consumers just doesn't pass the giggle test.

In truth, if an out-of-state retailer does not have nexus in the state, shoppers are already required by law to submit the sales tax to the state. The real question is over who should collect this tax – you as a consumer or the out-of-state retailer. Now, granted, our state has not really done much to enforce the collection of use tax from residents, but trust me, as the budget situation worsens, it will. So either you're going to pay it or someone is going to collect it from you.

Finally, as for those who worry that sales tax equity would somehow harm online business in the state, let me stress that most online retailers, including Wal-Mart, Barnes & Noble, and Sears, already collect and remit sales tax for online purchases. Technological advances have greatly simplified and automated this task. Huge corporate retailers like and are the few remaining holdouts and the money they siphon from our local community and residents is significant and growing exponentially each year.

So please, when you go to the Internet for some tax-free shopping, I would only urge you to remember that your purchase isn't really free at all. In fact, that tax-free purchase costs all of us and our communities a lot more than you might think.

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