Kentucky retailers know how to compete; that’s why so many have weathered this economy and record unemployment. It’s also how the commonwealth’s 51,000 retailers have grown to employ almost 390,000 Kentuckians and directly or indirectly support one in four Kentucky jobs.
However, they also know when the deck is stacked against them, as it is with a loophole that allows out-of-state retailers to do business in Kentucky without collecting the 6 percent sales tax. It’s no coincidence that there is, on average, anywhere between a 6 to 10 percent difference in price built into the sales price when out-of-state retailers don’t collect the sales tax.
On July 24, I shared this message with the Governor’s Blue Ribbon Commission on Tax Reform. After all, government shouldn’t be in the business of picking winners and losers. And unfortunately, that’s what is giving online sellers an unfair advantage over traditional merchants with actual stores — and employees — here in Kentucky.
Only Congress can fix this problem, and the Kentucky Retail Federation continues to urge Kentucky’s congressional delegation to become part of the solution by signing on as cosponsors of current legislation pending in both the House and Senate. Last month, Governor Steve Beshear joined our fight, requesting that each member support sales tax fairness.
Three bills to fix the problem have been introduced with bipartisan support in Congress: the Main Street Fairness Act, Marketplace Fairness Act and the Marketplace Equity Act. While each takes a slightly different approach, they would all allow states to move forward with sales tax collection on online and catalog purchases. And they all share the same message — it’s time to fix the problem.
Congressional action is needed because of a 1992 Supreme Court ruling in Quill v. North Dakota. Under the Quill ruling, retailers are required to collect sales tax from out-of-state customers only if they have a physical presence such as a store, warehouse or office in the customer’s state. So if a retailer doesn’t choose to locate here in Kentucky, they don’t have to collect our sales tax.
The court’s reasoning in Quill was that the numerous state and local sales tax systems across the nation were too complicated for a retailer to comply with. But that was 20 years ago, when George H.W. Bush was president, the World Series was in Toronto and Sir Mix-a-Lot was blaring out of car radios. State tax laws have come a long way since then, as has technology. The Streamlined Sales and Use Tax Agreement (SSUTA), which Kentucky was among the first states to join, has helped spur the simplification of sales tax collections in its member states, while non-member states have also taken steps toward streamlining their sales taxes. Today, sophisticated websites can track consumer purchases and therefore make collection of the sales tax possible.
I want to emphasize that this is not a new Internet or “.com” tax. Online and catalog transactions are already subject to the state's sales tax. However, if the retailer is out-of state, it's the consumer who is supposed to report on his or her state income tax return the amount of sales tax owed from online and catalog purchases. Of course, the vast majority of consumers don't do this because it's cumbersome and hard for states to enforce. According to the Kentucky Revenue Cabinet, just over $600,000 was voluntarily paid by Kentucky consumers in 2009. The Cabinet is able to collect another $12 to $13 million each year through voluntary out-of-state retailer compliance and our participation in the SSUTA. But that’s a drop in the bucket compared to what is actually owed.
Internet and catalog purchases that go untaxed are costing the commonwealth of Kentucky more than an estimated $200 million for fiscal year 2012 alone. That not only gives these out-of-state retailers an unfair price advantage, but also hurts our state tax coffers. This revenue could be used to educate Kentucky’s children, build infrastructure and grow our economy. Instead it goes to companies that don’t invest in Kentucky.
While no one wants to pay more taxes, the simple fact is that a tax should be applied fairly and across the board. A retail sale made at a Kentucky store should be treated the same way as a sale made at a Kentucky computer. It’s also important to note that in a country where many citizens consider the sales tax more inherently fair than some other forms of taxes, the disparity between who has to pay the sales tax and who gets a free pass is conspicuously unfair. This preference for the sales tax also has led more states to lean on it more, and in doing so they are losing tax revenue as more and more sales take place on the Internet.
Over the past two weeks, congressional committees in both the U.S. Senate and U.S. House have held hearings on the sales tax fairness proposals. The support there is growing, with members who previously opposed the proposals changing their positions. Even Internet giant Amazon.com, which has collected Kentucky sales tax since it has several physical locations here, recognizes action is inevitable.
Of course, some online and catalog retailers are still opposed to leveling the playing field. For the past decade, they’ve been turning Kentucky retailers into showrooms for their online sales. And they have done so without creating Kentucky jobs, spending money in our economy or contributing to local charities and civic groups. After all, when is the last time you saw an online retailer’s name emblazoned on the back of a Little League jersey or “.com” company employees from New Hampshire volunteering at a Habitat for Humanity build in Lexington?
It's time to finally close the sales tax loophole that online-only retailers enjoy at the expense of brick-and-mortar merchants. Let’s move Kentucky forward.
Tod Griffin is president of the Kentucky Retail Federation.