By: Lauren Miller, Guest Blogger and Senior at Kent Place School
The competitive structure of our economy is changing rapidly as e-commerce expands and more people choose online shopping as a cheaper and easier means of purchasing goods and services. Traditional brick-and-mortar retailers are not only disadvantaged by the feasibility of online shopping, but also by the state sales tax they are required to collect in their stores. Online retailers are currently not required to collect state sales tax, which gives them a 5%-10% (sales tax differs among states) price advantage over brick-and-mortar stores. It comes as no surprise that these stores are increasingly used as “showrooms” for consumers to view a product, decide if they want to buy it, and then purchase it online for less, free of sales tax.
According to current laws, businesses are required to collect a sales tax if they have a “physical presence” in a state. Technically, it is the buyers’ responsibility to pay the sales tax on their purchased goods to their states of residency. This part of the law, however, is poorly enforced. In 2011, Californian residents paid only 1.4% of the total taxes due by them to the state on their online purchases. Current laws have created an incentive for people to purchase goods online, meaning states are losing out on critical revenues.
If it becomes a law, the Marketplace Fairness Act (MFA), is expected to increase fairness and state revenue by requiring online retailers to collect state sales taxes on the goods they sell. It will eliminate the price incentive to shop online and raise an estimated $22 billion to $24 billion in state revenue. Those who oppose the MFA argue that it is unconstitutional on the grounds of “taxation without representation.” John DeMint, Republican Senator from South Carolina remarks, “If states want more taxes, they can raise taxes on their residents, but it’s antithetical to our federalist system to let states raise taxes on out-of-state residents.”
I disagree and argue that online retailers are not paying a tax, but rather collecting a tax due from state residents who purchase goods through online businesses. A New Jersey resident could purchase a soccer ball at a local sporting goods store for $10 and pay a 7% sales tax, costing her $10.70. However, if she purchased the same soccer ball from an online retailer for $10, she would be exempt from the sales tax and only have to pay $10, and the state of NJ would lose $0.70 in revenue.
The Economic Lesson: How is MFA sales tax classified? Traditionally, a sales tax is regressive, meaning people of low incomes pay a higher percentage of their incomes than people of high incomes on a taxed product. For example, in the soccer ball example, if a low-income person and a high-income person purchase the same soccer ball in NJ, the $0.70 sales tax is a greater percentage of the low income than the high income, and therefore the tax is regressive. However, Brad Plumer of the Washington Post reported, “[The MFA] would make tax collections slightly more progressive, since poorer Americans are less likely to shop online.” I disagree with his remark, and argue that if lower income consumers are purchasing more in brick-and-mortar stores, and higher income consumers are purchasing more online, then lower income consumers are paying a greater percentage of their incomes and the sales tax is regressive. If the MFA is passed, higher income consumers will be charged a sales tax on online purchases just as in a brick-and-mortar store, but lower income consumers will still pay a greater percentage of their income in sales tax, making the sales tax regressive, but less regressive than before.
Sources: The Washington Post article was helpful in breaking down the basics of the MFA, and the New York Times article, offered fascinating insight into the current debate. DeMint’s opinion of the MFA can be found here, and Plumer’s here.