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Tom Cochran Headshot

Time to End the Internet's Tax-Free Ride

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Traditional retailers recently received a big and much-needed boost from the Senate as it voted to close a sales tax loophole that has left local merchants at a competitive disadvantage for nearly two decades. The bill, known as the Marketplace Fairness Act, would essentially put a stop to tax-free online shopping and recalibrate the marketplace so that all retailers -- whether online or offline -- are competing on equal footing.

The bipartisan momentum coming off of the Senate vote, however, has stalled considerably in the U.S. House of Representatives and the bill now faces an uncertain future. Lobbyists for the online retailers, who have enjoyed a tax exemption at the expense of their Main Street counterparts, are currently in the process of mischaracterizing the bill and spreading false information about its net effect.

First and foremost, critics wrongly contend that the legislation would impose a new tax. Nothing could be farther from the truth as the bill is neither a new tax nor a tax increase. It simply updates our tax-collection system to reflect the steady growth of online sales, which rose to $225.5 billion in 2012 alone. As it stands now, online merchants only have to collect sales tax if they have a physical presence such as a storefront, office, warehouse or factory in the customer's state. This has given them a significant advantage as they can undercut prices by 5 to 10 percent, a margin that brick and mortar retailers just cannot realistically beat.

Furthermore, the bill aims to collect a tax that is already owed. Most consumers do not realize that they are technically required to report their Internet purchases on their tax returns and remit the appropriate sales tax. Hardly anyone does this and the states have no reasonable or efficient way to compel consumers to do so. The legislation would fix this problem and ensure that the taxes owed would be paid. In turn, this would give a shot in the arm to cash-strapped states, cities and counties, who would stand to collect $23 billion in revenue each year from online sales.

Opponents also argue that the legislation will place an excessive burden on Internet businesses because they will now need to navigate the tangled web of different tax rates in cities, counties and states across the country. This, too, is completely inaccurate as they fail to mention that the bill will require states to provide computer software, for free, that would streamline the collection process by helping retailers calculate the sales tax on each purchase much like the systems online companies use now to determine shipping costs based on zip code.

Moreover, states will be compelled to set up a one-stop shop to receive the Internet sales tax revenue, so retailers don't have to keep track of multiple sites. And, last, but certainly not least, it's important to remember that online businesses with annual sales below $1 million are exempt from the new sales tax legislation altogether.

The original purpose of this sales tax loophole was to encourage the commercial potential of the Internet. It is clear, though, that at this point, with sales skyrocketing, the subsidy is no longer necessary. So, why are some of our Congressional representatives fighting to keep in place a system that favors one category of business over another? Why would online retailers trump conventional stores and be allowed to squeeze them out of the marketplace?

By leveling the playing field, all businesses will be able compete in a fair and equitable way. Brick and mortar stores will no longer be used as mere showrooms for merchandise that consumers end up purchasing online at a discount because of the absence of a sales tax. As a result, merchants of every stripe will fight for customers by competitively pricing their goods, increasing product variety and providing better service -- all of which benefits American consumers and allows the free market to work the way in which it was intended. In the end, jobs will be created and the economy will be strengthened.

In a political climate of heated partisan divide, the Senate has shown the American public that they can set aside their differences and work together to push through a sensible solution to a decades-old problem. All eyes are on the House of Representatives now. We urge them to rise to the occasion and do what is right to close this sales tax loophole once and for all.