Taxing the Internet

Friday, a federal judge struck down Colorado’s so-called Amazon tax law. It was a victory for online megastores over Main Street merchants, one that we look to Washington to repair.

The law was passed in 2010, part of a group of laws enacted to end a series of tax credits and exemptions and in so doing raise $100 million to help balance the state’s budget. Passed primarily with Democratic support, the bills were mocked as the “Dirty Dozen” by Republicans who have since tried to repeal them.

The idea behind the Amazon tax was to collect sales tax on online sales in the same way sales at bricks-and-mortar stores are taxed. It was clearly a measure meant to raise revenue, but one with an important fairness component as well.

After all, why should Colorado merchants have to charge sales tax – effectively raising the prices they charge – but out-of-state companies operating online do not? Why give what amounts to a tax break to firms that compete against the Colorado businesses that build and support our communities?

Except that the fairness issue worked against law. Standing the issue on its head, Republicans attacked the law as unfair to out-of-state retailers.

And because of the way the law was implemented, the court agreed. In theory, sales tax has always applied to online purchases, but the courts have said Internet merchants cannot be required to collect it. What this law did was to encourage online retailers to collect the tax by imposing onerous and costly reporting requirements on those that did not.

Because that is different than what is required of Colorado merchants, U.S. District Judge Robert Blackburn threw out the law, saying the facts did not “support the conclusion that the act and the regulations regulate in-state and out-of-state retailers even-handedly.” Blackburn said the law imposes “an undue burden on interstate commerce” and is therefore unconstitutional.

That may be legally correct, but it is absurd to suggest that the Amazon tax actually puts the big online retailers at a disadvantage. Amazon itself had more than $34 billion in sales in 2010. It would take a regulatory burden of astronomic proportions to give a local storefront operation a leg up over a firm that size.

Giving Amazon the further advantage of tax-free sales, however, could do real damage to the mom-and-pop stores that give flavor and texture to small-town downtowns. That, not partisan “gotchas” about the “Dirty Dozen,” should be the primary concern for Colorado lawmakers – with an eye toward the state’s budget a close second.

The answer could come in a federal fix. A bill in Congress, called the Marketplace Fairness Act, would address taxing online sales in such a way that respects critics’ concerns. It would apply state sales taxes based on consumers’ location. And it would exempt any company with annual Internet sales of less than $500,000 to protect startups and small companies that may lack the resources to implement tax collecting.

Those provisions take care of most legitimate objections – so much so that this new variation on the Amazon tax has the support of Amazon. Its leadership is too savvy to think it would go untaxed forever and clever enough to want to see it done well.

The National Conference of State Legislatures estimates enacting the Marketplace Fairness Act could bring in as much as $23 billion for that states. Combined with fairness to local merchants, that makes a compelling case for supporting it.

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