The Internet revolution is touching all of our lives, giving us exciting new choices, services, and knowledge. Whether it is information, products, or services, chances are you can find it on the Internet, in addition to, or in lieu of, your local newspaper, store, or professional. This new competition is great for consumers and businesses alike. However, a key question for the future of e-commerce businesses–and their brick-and-mortar counterparts–is this: Will government treat local businesses and their remote competitors the same?

It makes no sense to give the “away team” tax breaks.

Taxation, marketing, and employment law all affect the profitability of Main Street merchants in Massachusetts. While over-regulation can hurt the profitability of any business, so can the lack of regulation of competitors located just over the border–or appearing on your computer screen at home.

The Retailers Association of Massachusetts strongly supports sales tax parity across all forms of retailing which market to Bay State consumers: brick-and-mortar stores, catalogues, and Internet sellers. Massachusetts retailers know the competitive significance of the sales tax due to our border with New Hampshire. The state sales tax should either apply to remote sellers, such as Internet and catalogue companies, or it should be removed from the sales of local retail stores.

Government should not create advantages for one type of business over another in the competitive marketplace. Nor should government discriminate against low-income consumers by allowing those with financial means to avoid taxation. Already, low-income residents find it harder to comparison shop for the lowest prices, due to constraints on transportation and store availability. Now, to add insult to injury, government allows higher-income consumers to avoid paying sales taxes. Those who have the financial wherewithal to buy a computer, pay monthly access fees, and keep their credit cards below the maximum can make purchases online tax-free. Failing to impose sales tax on Internet purchases makes this tax more regressive, hitting only those who lack the means to avoid it.

Tax revenues for our schools and other essential services are also at stake. A national study by the University of Tennessee estimates that Massachusetts will lose $300 million in sales tax revenue by the year 2003 unless sales tax is enforced upon Internet sellers. Equally important are the vacant storefronts in our downtowns and the loss of employment (as well as income taxes) that will result from local merchants closing down due to their disadvantaged position.

Arguments that the enforcement of the sales tax upon Internet sellers will injure emerging dot-com companies are simply without merit. Several online companies are already collecting state and local taxes, and the compliance services and software capabilities necessary to fulfill this obligation have existed for years. The only real threat is to the investment-return fantasies of venture capitalists who have jumped onto questionable business models that count on unfair competition for success.

Some dot-com companies also object that their “virtual” firms have no impact on local services, and thus shouldn’t be required to collect local taxes. But Dallas Mayor Ron Kirk has a ready reply for that one: “Perhaps we will be forced to send a virtual fire truck next time one of their warehouses goes up in flames!”

The irony here is that the tax has always been due. Purchases from sellers with no physical presence in a state create a “use” tax obligation, with the consumer, rather than the seller, required to remit the tax to the taxing authority. But use taxes are rarely paid, and states have no way of tracking them down. The only way to tax purchases uniformly is for sellers–all sellers, no matter where they are located–to collect the tax upon sale.

For the past five years, states have been prohibited from creating a level sales-tax playing field by a moratorium on Internet-related taxes passed by Congress. This moratorium, which is due to expire on October 21, was intended to prevent the imposition of new levies on Internet access and use. In August, 44 of the nation’s governors wrote to Congress urging that the moratorium on new Internet taxes be renewed only if states are given the authority to collect the taxes they are now due, in the context of a streamlined and simplified sales tax system.

The National Conference of State Legislatures and the National Governors Association are both working on legislation in state capitals across the country to achieve such a simplified system. By making state laws consistent, using similar tax definitions, and by replacing the hodgepodge of state, city, and county sales taxes with a single state tax collection authority in each jurisdiction, it will be easier and less costly for remote sellers and Main Street stores alike to collect taxes on their sales.

Meet the Author
Support for this simplified but uniform approach to sales taxes has been strong within the Massachusetts congressional delegation, with US Rep. Bill Delahunt and Sen. John Kerry serving as national leaders on the issue. Unfortunately, Gov. Jane Swift did not join with the 44 other governors to push for equal tax treatment. In fact, the Commonwealth has been a no-show in the national project undertaken by at least 40 state administrations to reform, simplify, and streamline state sales tax compliance and collection. Legislation sponsored by Rep. Phil Travis (D-Rehoboth) would bring us to the national table, making the Bay State part of the solution rather than a foot dragger on this vital issue.

Massachusetts retailers employ hundreds of thousands of workers in our state, pay taxes to support our schools and essential services, and contribute to our community organizations with time and dollars. We also know that Massachusetts has a great interest in the Internet economy. But the reality is that most large-scale e-commerce retailers set up shop in states where real estate and labor costs are low. It makes no common sense–or political sense–to support the “away team” by granting tax exemptions to out-of-state firms at the expense of merchants who locate and operate here.

The retailing industry does not support new taxes on the Internet, such as access or business activity taxes. But our industry does believe that existing sales taxes need to be applied fairly and evenly to all sellers competing in the same marketplace. Common sense dictates that government not allow its tax laws to create two classes of sellers and two classes of consumers. Congress, state legislatures, and the nation’s governors must take immediate steps to ensure tax fairness by applying the sales tax equally to local and remote sellers–or by repealing it for the benefit of local employers and consumers alike.

Jon B. Hurst is president of the Retailers Association of Massachusetts.