After 20 Years, Congress May Finally Pass Internet Sales Tax. Is it Too Late to Save Local Businesses?

Online retailing giant Amazon was criticized as "anti-competitive" Saturday for its latest promotion that encourages consumers to enter stores and leave empty-handed, after reporting back the prices they find there.

This article was published in partnership with the  Institute for Local Self-Reliance. 

The Senate's passage of the Marketplace Fairness Act last week, on a 69-27 vote, marks a watershed in the 20-year fight to extend the requirement to collect state and local sales taxes, long imposed on brick-and-mortar retailers, to their large online and mail-order competitors. 

The bill, which allows states to compel remote retailers to collect sales taxes if they have more than $1 million in internet and mail order sales, faces a tougher road in the House, where some conservatives have vowed to block it.  But momentum from the lopsided Senate vote, the bill's two dozen Republican co-sponsors, and sustained pressure from Main Street retailers may well win the day. President Obama supports the measure. 

Passing this bill is imperative for anyone concerned about fairness.  There's no good reason government should be giving consumers a 4 to 10 percent incentive to choose online retailers over local stores. Nor should someone who, say, buys wedding invitations from an online vendor or a television set from Amazon get a pass on supporting her state's schools and services, while her neighbor who prefers local shops gets stuck with the tab. (Technically, shoppers owe sales tax even when an online seller doesn't collect it, but fewer than 1 percent of people actually send the money to their state.) 

Nevertheless, a looming question is how much difference correcting this disparity will make at this late date.  Had Congress acted a decade ago (or way back in 1992 when the U.S. Supreme Court explicitly invited it to look at the issue), many independent Main Street retailers would still be in business and our online shopping landscape would almost certainly be more diverse and dynamic than it is.  Today, Amazon — which, in addition to its namesake site, owns dozens of internet brands, including Zappos and Diapers.com — accounts for a staggering one-third of all the items we buy online.  The company posted $61 billion in sales last year, almost double its 2010 revenue.  

Amazon's success is a product of its own ingenuity together with a huge helping hand from government.  Although the retailer has always insisted that getting a free ride on sales tax is not integral to its strategy, its actions suggest otherwise.  In an unguarded interview with Fast Company in 1996, a year after Amazon launched, founder Jeff Bezos said that avoiding sales taxes drove the company's decision to locate in Seattle.  California had the technical talent that Amazon needed, Bezos explained, but locating in such a populous state would mean forfeiting its ability to peddle goods sales-tax free to a large swath of the U.S. population.  (Under current law, retailers must collect sales tax in states where they have a physical location or other tangible "nexus.") 

Holding on to this competitive edge was a top priority for Amazon for the next 15 years.  According to the Wall Street Journal, the company maintained a map showing states where employees were barred from traveling unless they were first grilled by a lawyer and outfitted with special business cards indicating they worked for a subsidiary, rather than Amazon.com, lest their activities trigger nexus for sales tax purposes.  Clearly, Amazon believed collecting sales taxes would eliminate its competitive edge and doom its growth.  

As it expanded, Amazon played states against one another to win deals allowing it to build warehouses and still not collect sales taxes.  By 2010, it was operating in 17 states but collecting sales taxes in only 4.  Amazon even went so far as to conceal its presence in some states.  Texas officials, for example, were unaware that Amazon operated a giant warehouse in the state until the Dallas Morning News published an expose on the retailer's tax-dodging. When the state sued for $269 million in back sales taxes, Amazon threatened to shut down the facility and fire hundreds of people in retaliation. The state eventually canceled the tax bill after Amazon offered to build additional facilities in Texas.