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Sales Tax Fairness

Sales Tax Fairness

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Invest in U.S. Jobs

The NRF Retail Opportunity Index encourages Congress to invest in U.S. jobs by implementing tax policy that makes U.S. companies competitive in the global economy and provides a level playing field among all sectors of the economy and all sectors of retail. Learn more.

The Issue

Main Street retailers in the 45 states with a sales tax are required by law to collect tax on virtually all of their sales. The same applies to online merchants selling to customers in their own states. But with the rapid growth of the Internet, local stores are facing increased competition from large out-of-state online sellers who easily undercut them on pricing because of low overhead and high volume. And, under a 1992 Supreme Court ruling, those out-of-state competitors hold a further price advantage because they are not required to collect sales tax from customers in states where they don’t have a physical presence — such as a store, office or warehouse. With an estimated $25 billion in sales taxes going uncollected each year, this disparity is threatening jobs provided by local retailers and is getting worse as more shopping moves online.

Why It Matters to Retailers

America’s sales tax system unfairly favors online retailers — who are not required to collect sales tax on most sales — at the disadvantage of local bricks-and-mortar merchants. With sales tax amounting to 10 percent in some areas, Main Street retailers are seeing increased evidence that their customers are buying online in order to avoid the tax. Many local retailers report the phenomenon of “showrooming,” where consumers come into their stores to look at merchandise, then order it online. Smartphone apps that let shoppers scan product bar codes to see where an item can be purchased online make it easier for customers to avoid sales tax.

The disparity in sales tax rules undermines not only Main Street retailers but also the communities they support. The billions of dollars in lost sales tax is revenue badly needed by cash-strapped state and local governments to pay the salaries of essential workers such as police officers, firefighters, ambulance crews, and schoolteachers. Those public workers are among retailers’ customers, and when customers lose their jobs retailers lose sales.

Online sales tax policy also has implications for the broader economy as well. A study conducted by prominent economist Arthur Laffer estimates that requiring online sellers to collect the same as local stores could lead to a $563 billion increase in gross domestic product and 1.5 million new jobs by 2022.

Why sales tax fairness matters on Main Street
Hear from retailers why this issue matters to their businesses and communities.

NRF Advocates for Sales Tax Fairness

With two major bills pending and bipartisan support in both chambers, Congress appears to be moving toward long-delayed passage of sales tax fairness legislation. In a recent letter to the editor in the Wall Street Journal, NRF President and CEO Matthew Shay said the time has come to end the stalemate: “By allowing online sellers to play by different rules, Congress is hurting local retailers trying to compete against the unfair, built-in price advantage of not collecting sales tax.”

Senator Michael Enzi, R-Wyo., has reintroduced the Marketplace Fairness Act, which would allow states to require online sellers to collect sales tax the same as local stores regardless of whether they have a physical presence. The measure passed the Senate in 2013 only to die in the House.

In the House, Oversight and Government Reform Committee Chairman Jason Chaffetz, R-Utah, has introduced the Remote Transactions Parity Act, which attempts to address concerns voiced by opponents of the Senate bill. Among other provisions, online retailers doing less than $10 million a year in out-of-state sales would be exempt during the first year if the legislation becomes law, dropping to $5 million in the second year and $1 million – the same small business exemption provided in the Senate measure – in the third year. In addition, those with less than $5 million would be exempt from audits by tax officials in their customers’ states as long as they use certified software to handle sales tax. NRF said the bill “adds significant simplification to the sales tax collection process.” In addition, Judiciary Committee Chairman Robert Goodlatte, R-Va., held a hearing in 2014 and released principles to be included in sales tax legislation but has yet to introduce a bill.

In an unexpected development, U.S. Supreme Court Justice Anthony Kennedy said in 2015 that the court got it wrong in its 1992 ruling on sales tax, relying on a 1967 precedent on physical presence rather than a “more recent and refined” test established later. Kennedy called on opponents of the 1992 decision to file a case that would let the court correct its mistake.

NRF believes it’s time to level the playing field so all retailers — no matter which channel they sell in — can remain competitive. While a number of states have passed their own legislation attempting to address the issue, NRF believes the solution to sales tax collection must be mandated by federal law, be fair and apply to all sellers, and be flexible enough for states to adopt and sellers to comply.

NRF has spent more than a dozen years lobbying on Capitol Hill, testifying before Congress, working with governors, state treasurers and state legislators, and explaining the issue to the news media.

Time for Retailers to Get Involved

Retailers who support sales tax fairness legislation need to contact Congress and tell lawmakers about the impact untaxed Internet sales have on local stores, jobs, and economy. NRF believes it’s time to pass legislation that would level the playing field between online and bricks-and-mortar retailers.

Small business owner Kim Williams of Tallahassee, Fla., discusses the importance of sales tax fairness for local Main Street retailers.
Small business owners Teresa Miller (Missouri) and Jim Adams (Maryland) discuss the need for Congress to level the sales tax playing field among online and local retailers so companies can compete and communities can grow.