The New York Times said the following in a recent editorial:
On Cyber Monday this month, a big day for online shopping, the Supreme Court quietly cleared the way for states to begin collecting some $13 billion in sales taxes that go uncollected each year on Internet purchases. That development creates an important opening for hard-pressed states to update their sales-tax codes broadly.
For decades, online retailers have relied on a 1992 Supreme Court ruling to avoid sales-tax collection in states where they have no physical presence. That has given them an unfair advantage over brick-and-mortar retailers and has deprived states of billions of dollars of sales tax revenue.
In 2008, New York fought back. It passed a law requiring sales tax collection by online retailers that use New York-based affiliates, which are companies whose websites link shoppers to online retailers. New York was on solid ground because the Supreme Court had said that “physical presence” means not only buildings and employees, but also representatives who market a retailer’s goods. Online retailers challenged the law, but the Supreme Court has now declined to hear the case, in effect, upholding the New York statute and similar laws in 13 other states.
The states that have no such law would be wise to follow New York’s model. State tax revenues have only barely returned to pre-recession levels, which is not nearly enough to meet today’s needs. At the same time, federal aid to states is falling. The results are dire. For example, most states are providing less money per student this academic year than before the recession, while federal cuts have slashed aid to high-poverty schools, according to the Center on Budget and Policy Priorities.
Taxing online purchases of merchandise is only one way to tax Internet commerce. Twenty-three states lose some $300 million a year because they do not tax downloads of music, movies, games, books and other items that are sold and delivered digitally. Forty-two states lose some $350 million a year because they let online travel companies charge sales taxes based on the wholesale rate they pay hotels for the right to rent rooms, rather than the price they charge customers.
While sales taxes are generally regressive, sales taxes on Internet purchases tend to spare low-income consumers somewhat because they shop less online than those with higher incomes. Broadened sales taxes could also be paired with more progressive state income taxes to ensure that the burden is widely shared.
Ideally, Congress would pass a law to ensure uniform and comprehensive taxation of Internet sales. Until that happens, states will have to act on their own.
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