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Why it makes sense for e-tailers to add sales tax to our shopping carts

Posted by Scott Kirsner  December 29, 2011 12:32 PM

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In Boston, we have a long history of rebelling against taxation. So I guess I shouldn't have been surprised last week, after I wrote about Amazon.com's plans to set up an office in Cambridge. Most of the e-mail I received was not about how to get a job with the pioneering e-tailer, but about sales tax. Namely, whether and when Massachusetts residents might have to start forking over the state's 6.25 percent tax when they bought stuff from Amazon, since the company would now have a physical location here — the legal "nexus" — that could force them to start collecting tax.

The first person to comment on my blog post cautioned, "...If you get Amazon gift cards for Christmas, you might want to use them as quickly as possible." The taxman cometh!

The particulars of the Amazon situation still aren't clear, as the office hasn't opened, and the Massachusetts Department of Revenue hasn't yet shared its position on whether Amazon will need to start adding tax to the tally.

But the bottom line is that states sales tax could be added to all e-commerce transactions soon, for any company that chalks up more than $500,000 in out-of-state sales a year. A bi-partisan bill introduced in the Senate in November, the Marketplace Fairness Act, seeks to collect an estimated $23 billion in annual state and local tax revenue that today doesn't get collected. The bill leaves it up to each state whether or not to collect the taxes, and also attempts to simplify the process of ponying up for e-tailers.

No one likes paying more taxes, but here's why I'm in favor of allowing states to require e-commerce sites to collect sales tax.

First, this is not a new tax. It's a tax that we were supposed to be paying all along. Whenever you buy something from a Web site or catalog, you're supposed to pay a 6.25 "use tax" to the state. How many of us do that, when we buy a new book, bike, or pair of boots online? About 1.6 percent of Massachusetts tax filers, according to the state. Who are those people? I suspect they must have plans to run for political office or be appointed to the Cabinet at some point.

Second, in the early days of e-commerce, it seemed unfair to saddle small start-ups with the burden of figuring out the proper tax rate on each purchase, collecting it, and handing it over to the right agency. Plus, in the late 1990s, we wanted to encourage the creation of e-commerce businesses, not over-regulate them. They were seen as nimbler and more inventive than those staid "bricks and mortar" retailers.

Today, it'd take a millisecond or two for a Web store to take your ZIP code and consult a database of tax rates — the same way it calculates shipping costs — and add the right percentage to your purchase. And the Streamlined Sales Tax initiative, created in 2000, wants to make it easier for online merchants to send the money to the right place. (Massachusetts hasn't yet signed on, but the legislature's Committee on Revenue recommended doing so last summer.) One reason that the Supreme Court ruled, in 1992, that out-of-state businesses didn't have to collect sales tax was that doing so was too complicated. That has changed.

And it isn't the online merchants who feel like fragile seedlings in need of protection any more. For the 2011 fiscal year, analysts predict that Amazon, the biggest online retailer, will have raked in about $48 billion in revenue, up about 42 percent from 2010. In 2011, Borders, a once-successful bookstore chain that had been in business for forty years, closed all its stores. The last year it turned a profit? 2006. In 2011, Filene's Basement faced the final mark-down, while Boston-based Rue La La, an online discounter of stylish apparel, continued its hiring streak. It's hard to argue that online merchants, with their vast inventories and ultra-efficient logistics, are at a disadvantage these days.

Third, states need the money. In Massachusetts this year, legislators had to deal with a budget shortfall of $1.9 billion. That forced them to cut funding to higher education, healthcare for the poor and elderly, and clothing allowances given to kids on welfare. Collecting state sales tax on Internet purchases wouldn't have alleviated the need for any cuts, but it would have provided about $268 million in additional revenue to the state, according to the National Conference on State Legislatures. Nationally, about $23 billion in sales tax goes uncollected, and that number will only rise as more purchases get made online.

Finally, continuing to give e-tailers a free pass on state sales tax will have a big impact on our Main Streets — and malls. Those old-school bookstores, clothing boutiques, and furniture showrooms pay rent and support local jobs. Many of them offer a first experience in the workforce to our teenagers. They often sponsor things like charity fashion shows and neighborhood sports leagues. And from a purely consumerist perspective, you can try on a pair of jeans or actually sit in a canoe before you make a purchase decision — rather than just chatting with a customer service rep who may never have laid eyes on the item you're considering.

Massachusetts has been the birthplace of great offline retailers like TJX Corporation, great online retailers like Wayfair (a Boston company which this year will surpass $500 million in sales), and great hybrids like Framingham-based Staples, which operates more than 2,000 stores and is also the #2 online merchant, behind Amazon. (Coincidentally, Staples now owns Quill Corporation, the office supply merchant whose lawsuit led to that 1992 Supreme Court decision that let out-of-state companies off the hook with regard to collecting sales tax.) I think our position ought to be that we want to create a level playing field where small, independent retailers can continue to be part of the fabric of their towns... where e-commerce start-ups can grow...and where new retail concepts can develop into the next Staples. And that means that all of those players, whether based on the Net or on Newbury Street, ought to be collecting the appropriate state sales tax from their customers.

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Scott Kirsner was part of the team that launched Boston.com in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.

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