D.C. holds $23 bln fix for cash-strapped states

April 4, 2012

By Daniel Indiviglio

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Washington may just hold a $23 billion fix for the nation’s cash-strapped states. That’s the upper limit of what could be raised if local governments were allowed to tax online retailers, according to the National Conference of State Legislatures.

Unfortunately, a pre-Internet court ruling currently forbids states from forcing sellers to collect such tariffs. That’s why last week Georgia became the latest state to resort to contorted ways around the rule. But a federal solution would be better – and luckily a bipartisan group of senators appears to have hit on one that even giant web retailer Amazon supports.

That’s no mean feat. The online mega-store has been a vocal opponent of earlier attempts to introduce a tariff on web purchases. The problem stems from a 1992 Supreme Court ruling calling for a federal directive to force out-of-state vendors to collect sales tax on mail orders. So in most states the onus is on the consumer to pay up, which means no one ever does.

To date, only individual states have tried to kick-start the process, as Georgia did last month. They argue that advertising and links with locally based affiliates effectively created an on-the-ground presence which made their wares liable to be taxed. But these schemes were often only aimed at the largest retailers and would constrain their ability to work with local companies.

Congress’s Marketplace Fairness Act avoids those pitfalls. It also eschews the flawed origin-based model, which would tax sales in the state where a cyberstore is based. That would mean some states would collect levies grossly out of proportion to the size of their population.

Instead, the legislation would distribute the monies collected based on each state’s inhabitants’ spending. And it would also smartly exclude Internet retailers with less than $500,000 in annual remote sales who might struggle to collect the tax. Including all retailers above that threshold, rather than just web titans, is what has helped secure Amazon’s support. It also charges its marketplace sellers for collecting sales tax for them, though swears it doesn’t generate a profit from that service.

Such backing may make the budding congressional bill easier to pass. That would give states the chance to claw in some much-needed cash. Sure, even as much as $23 billion won’t repair all their busted budgets. But it would certainly help.

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