The American free enterprise system, a marketplace economy featuring dynamic innovation, entrepreneurial risk-taking and robust competition, is what makes the United States such an inspiring country in which to start and grow a business. Over the past two decades, the Internet has burst onto the scene and developed into a vital, vibrant commercial platform in both the retail economy and the business-to-business space. It comes as no surprise that businesses of all sizes in various industries have taken to the Web in an effort to tap its economic potential. Our technology is cutting edge, but sadly, our sales tax system is stuck in the early 1990s thanks to a two decades-old Supreme Court decision (Quill v. North Dakota) — unable absent a federal legislative remedy to evolve to meet this vividly present and rapidly growing economic reality. Congressional action is needed now to ensure the free marketplace of the 21st century is one that features a level playing field for all who compete.
Right now, many merchants who sell their products online and do not have a physical presence; i.e., a distribution center, warehouse or retail store, in the state into which their product is sold aren’t charging and, thanks to Quill, cannot be required to collect at the point of purchase state sales taxes on those sales. This stands in stark contrast to local wholesaler-distributors and retailers — businesses that have a brick-and-mortar presence on the Main Streets and in the commercial and industrial parks of our cities and towns and who provide jobs to our family members, friends and neighbors — who are required by law to do so. Under this antiquated tax loophole cemented in law by a pre-Internet-era decision the Supreme Court virtually invited Congress to overrule, remote sellers enjoy what amounts to a federally protected price advantage which can reach up to 10 percent over their brick-and-mortar competitors. Since after-tax margins in wholesale distribution typically run in the 2 percent to 2.5 percent range, it is not difficult to understand what this means for the “typical” wholesale distribution business or its employees.
I’ll cite one glaring example that presents itself principally in the retail space to illustrate how the present federally protected favoritism being shown remote online sellers hurts local employers and our national economy more generally. Take the case of Alibaba, the giant (larger than Amazon and eBay combined!) Chinese retailer that just had the largest initial public offering in Wall Street history. Alibaba is now doing business in the United States and taking full advantage of the outdated sales tax loophole. Unlike America’s Main Street wholesaler-distributors and retailers, Alibaba doesn’t have to collect sales taxes here. Until federal legislative action is taken to equalize the treatment of remote online sellers with local brick-and-mortar merchants, China’s largest company will grow ever richer at the expense of domestic wholesaler-distributors and retailers whose very existence will be threatened along with the jobs they provide.
To fix this unfair system, 69 senators voted last year on a bipartisan basis to pass the Marketplace Fairness Act, a common-sense bill that forces nothing: It simply gives states the right to require remote sellers to collect at the point of sale sales taxes that are already legally due. Despite what some have said about the MFA, this is not a tax increase, nor does it create any new tax. By giving states with a sales tax on the books (there are 45 of them) the necessary tools to collect what is already owed, the MFA actually alleviates the burden on consumers who are today obligated to calculate and remit this tax themselves.
Unfortunately, the Senate-passed MFA has stalled in the House and time is running short in this session. But the story need not end there: Congress has an opportunity before finally adjourning for the year to level the competitive playing field for both online and brick-and-mortar businesses. It is an opportunity Congress must not let slip away.
Dirk Van Dongen is president and CEO of the National Association of Wholesaler-Distributors.