Given the current economic challenges for our Village business district, I have thought about the competition our downtown businesses receive from the Internet and pose the question, ‘Should there be sales tax on Internet purchases or should our Internet shopping remain generally tax free?’
Sales on the Internet skyrocketed in the last two decades with a current estimate of $136 billion in sales annually. Because it was so new, in its infancy, Internet sales went largely unregulated. It all came to a head in 1992 when the Supreme Court heard the case of Quill Corporation vs. the State of North Dakota. Quill, an office supply company based in Delaware, was selling $1 million worth of products in North Dakota and the state sued for their share of revenue.
The Court’s rationale for ruling in favor of Quill was that sales tax levied on products sold at ‘brick and mortar’ stores was money used to defray the cost of police and fire services to protect the stores as well as to provide local amenities that would enhance the business climate. So if there was nothing to protect, there should be no tax. Thus the court required a ‘physical presence’ in a state to trigger sales tax.
The Court also referenced the now infamous Commerce Clause stating interstate taxing would create an unrealistic burden on interstate commerce. However, they specifically noted that an act of Congress could change this rule.
Due to the economic downturn, there is currently a bipartisan effort in Congress to require on-line retailers to collect taxes for the states where the products are delivered.
However, on this issue like many others, there is an ideological divide; some politicians want to hold the line on any ‘new’ taxes during poor economic times period vs. those who think that the issue goes to the heart of states rights and each state should be allowed to tax accordingly. By all accounts, nothing will happen until post the Presidential election.
This is a topic very ripe for smart minds to disagree. Those who believe an Internet sales tax is long overdue cite the following arguments:
- Internet sales will continues to prosper given the American lifestyle even if taxed and the Federal ban denies local governments a much needed revenue source
- Traditionally, sales tax revenue is extremely significant totaling $150 billion annually and accounting for 1/3 of all revenues of the states. Massachusetts estimated they ‘lose’ $335 million annually on lost revenue from Internet sales and California’s losses are pegged at $1 billion yearly.
- This is a not a ‘new’ tax. Every transfer of goods has resulted in some tax; Internet sales were just exempt from the norm.
- The vibrancy of small town business districts have a direct relationship to the value of nearby homes and real estate and it is unfair competition to start with an 8% cost increase out of the box.
- Local stores spend hours training people on items such as camera equipment only to have customers use this knowledge to buy the same equipment on the Internet.
- Retail jobs in local stores are threatened every year that the playing field is not equalized.
Those in favor of a ‘no-tax’ internet purchase argue:
- This tax would hurt the “national economy” in a very significant way.
- Providing a new source of revenue for states and municipalities is a disincentive for communities to decrease the size and cost of government and belt tighten.
- “Mom and Pop” Internet successes would fail if they had to add the technology to deal with over 9,000 taxing jurisdictions and their permutations.
- EBay and other ‘reused’ product sites contend their products have already been taxed at point-of-purchase .
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Though little known, every resident in New York is required to report our non-taxed Internet sales as a ‘use tax’ to be recorded on our tax form from a calculated percentage. New York has this provision, but it is not enforced.
In contrast, Pennsylvania enforces this provision and if one has no purchases on line 25 of their tax form, this automatically triggers an audit.
The issue is complicated to say the least. If an Internet tax is connected to point-of-sale as is the law for brick and mortar stores, will there be a migration of on-line store operations to Alaska, Delaware, New Hampshire and Oregon, the only states without a sales tax.
Bringing it down to the local level, Bronxville residents purchasing goods on the Internet pay in so many other ways, so that the ‘no tax’ incentive to purchase on the Internet proves to be more costly and short sighted.
To put it all in context, in 2007-2008 the Village received $911,718 in sales tax revenue. Without this money, Village taxes would have risen 12% based on this one line item alone. In 2010-2011, the revenue dipped to $838,143 causing the Village to decrease services, cut staff and raise the parking meter fee.
Bottom line, if you shop on-line vs. Pondfield Road, you will be paying those ‘unpaid’ taxes in the form of increased property taxes and/or a decrease in Village services.
A purchase in the Village sends money directly to the school and the Village. It also helps maintain an economic vibrancy that increases home values. Our merchants are also the donor benefactors to every charity, raffle and school fair. Amazon contributes to none of the above.
I expect all of these arguments to be at the fore when the issue is sure to be debated in Congress in 2013.