Although the two parties in Congress remain torn on many issues, we are hopeful that they can reach bipartisan consensus this year on one issue of great importance to states: leveling the playing field between online retailers and brick-and-mortar businesses that provide jobs and revenue to states across the country.
Fortunately, Congress can correct this inequity. The Marketplace Equity Act (H.R. 3179), along with similar bills such as the Marketplace Fairness Act (S. 1832), supports the collection of taxes that are already owed to states and local governments, encourages competition and benefits consumers. These bills would help states modernize their tax systems, level the playing field between Main Street retailers and online sellers, and streamline tax collections.
Today, the House Judiciary Committee will review H.R. 3179. As co-lead governors for this issue at the National Governors Association, we feel it is important to be on record again with our support of bills that affirm state revenue authority. This bipartisan bill is critical to stopping the erosion of our sales tax base, particularly as we continue to struggle with states’ fiscal conditions.
While individuals may owe sales tax on all purchases, at present states can compel only those retailers with a physical presence in an individual state to collect its sales tax. This is because of Supreme Court decisions that predated the Internet and electronic commerce. The court concluded that state laws were too different and complex to make out-of-state and, subsequently, online businesses collect unless the seller was physically present in the state.
Since those decisions, the Internet has grown, tax-collection technology has improved, and many states have taken strides to streamline their tax systems to make it easier for retailers operating in multiple states to collect sales taxes. Moreover, the court also ruled that Congress has the authority to empower states to collect this revenue. It is past time for Congress to accept this invitation to act.
This is an issue of federalism. States should have control of their own tax bases, and sales taxes have traditionally been a significant source of state revenue. Today, the explosive growth of electronic commerce — $164 billion in 2010 and growing more than 10 percent annually — means states’ sales tax bases are eroding. The state of Washington and its localities lost more than $440 million in the past fiscal year because of uncollected sales tax on Internet purchases, and Tennessee state and local governments lost more than $380 million that same year. This is a dangerous trend for states that rely on sales tax revenue and work hard to keep their tax structures competitive.
It is also an issue of fairness. Local retailers are at a competitive disadvantage when they collect sales tax and online sellers of the same products do not. Local retailers, many of whom are small mom-and-pop operations that employ our neighbors, are the backbone of many communities, but they often serve as the unintentional showrooms for online sales.
Does anyone believe that companies who have mastered the Internet to market and sell cannot calculate sales taxes for the states? Technology and apps exist to make those calculations just as they exist to calculate shipping cost based on ZIP codes or compare prices among sellers. The “marketplace” bills build on a state agreement to streamline and simplify taxes to make it easier to collect and remit sales taxes wherever a company does business. They recognize new market and technological realities. Making it law would allow states to collect taxes owed, help businesses comply with different state laws and provide a level playing field for all retailers that will benefit consumers.
In Tennessee and Washington and in states all across the country, our Main Street stores — large and small, alike — compete with out-of-state and online competitors who are not collecting sales tax from our residents who make purchases. Businesses should compete on a level playing field of price, quality and service, not on the ability of one class of competitor to avoid collecting sales tax. The system is unfair and favors online sellers over the Main Street stores and small businesses that are members of our local communities and create most of our jobs.
All states must balance their budgets, and erosion of the sales tax base increases pressure to raise rates and makes it more difficult to address key priorities such as education and workforce development. States are advocating a common-sense structural solution to help small businesses, preserve jobs and simplify taxes.
We urge Congress to include marketplace fairness on its list of legislation to be completed this year.
Washington Gov. Chris Gregoire (D) is a former chair of the National Governors Association and co-lead governor on this issue. Tennessee Gov. Bill Haslam (R) is a former vice chairman of the Education and Workforce Committee and co-lead governor on this issue.