State should tax online sales to level retail playing field

An team member loads boxes of fulfilled orders into a truck at their Fernley, Nev., warehouse on Monday, Dec. 1, 2008. (AP Photo/Scott Sady)

As “Cyber Monday” quickly approaches, South Carolinians should be mindful that buying from online national retailers that do not collect South Carolina sales taxes not only puts our local retailers at a competitive disadvantage but robs our state from necessary resources to fund government.

This includes paying for necessary road, highway and bridge repairs and providing adequate funding for our public schools.

Last January, I filed Senate Bill 170, which passed the S.C. Senate in the spring by a vote of 37-4. The bill now resides in the House Ways and Means Committee, and I’m optimistic of a hearing on this legislation from Chairman Brian White.

The bill is simple at its core, and is, at the end of the day, about “fairness” for our state’s local brick-and-mortar” retailers and the “mom and pops” across “Main Street” South Carolina. Similar in nature to legislation passed in at least 14 other states (including North Carolina and Georgia) it simply requires that “remote sellers” — aka “Internet” or “e-commerce” retailers — located outside of South Carolina collect and remit sales tax from their South Carolina customers in the same manner that South Carolina-based mom and pops already are required to do.

This is first and foremost about fairness. Under current law, an out-of-state retailer that does not collect S.C. sales tax has a built-in 6-8 percent price advantage over our state’s very own, often home-grown, local businesses.

Why? Because an archaic 23-year-old U.S. Supreme Court ruling known as the Quill decision held that the only way a state can compel collection of sales tax from out-of-state retailers is if that retailer has a substantial “physical presence” (or “nexus”) in the state that is trying to collect the tax. And while the court has made it clear that Congress can, at any time, pass legislation re-defining what “nexus” means to correctly take into account how drastically and quickly our economy has shifted away from traditional “storefronts” and to online sales, Congress, of course, has consistently failed to take any action. Its failure, motivated by fear of no-tax pledges and deep-pocketed special interests with ties to the rise in e-commerce, continues to cost home-grown retailers and local economies jobs and income.

State and local government revenue continues to suffer along with our home-grown businesses as well. According to our state’s official economic forecasting agency, the S.C. Office of Revenue and Fiscal Affairs, South Carolina’s lack of a strong nexus law, coupled with a do-nothing Congress, costs South Carolina state and local governments an estimated $100 million in lost sales tax revenue annually. This is not fair, and is costing our local economies and government revenues. Unless S.170 bill becomes law or until Congress finally acts, the damaging effects to our businesses and ability to provide basic state services are only going to grow.

Consider that (according to the Office of Revenue and Fiscal Affairs) growth in e-commerce retail trade has been rising at an astonishing rate over the last 10 years, averaging almost 20 percent per year over the last decade. This rate of growth far surpasses the rate of growth of general brick-and-mortar sales and is reflective of our rapidly changing economy — and not just what we buy but how we buy. Although our economy is changing, the state’s blue ribbon Taxation Realignment Commission (TRAC) found several years ago that our state’s tax code simply hasn’t kept pace with the changing economy. My proposal helps rectify this growing reality.

It is extremely important to point out that this legislation is not a tax increase. That’s because technically South Carolina law (as in every other state with a sales tax) requires South Carolina residents who purchase a product from an out-of-state retailer to pay what’s known as a “use tax,” which is basically the same as a sales tax. But the problem with this is that it puts the burden entirely on the customer to pay the tax, and not the retailer, which is what most customers are familiar with. On top of that, customers can’t pay the tax at the time of the purchase while it’s fresh on their minds. They must wait and pay this sales tax as part of their income tax at the end of the year.

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This is simply confusing and very inefficient, both for the customer and the state. Of the almost $3 billion in state sales tax collected each year, less than $10 million comes in the form of self-reported “use tax.” It is time to recognize that we live in a different world than the times of the 23-year-old Quill decision.

The state’s tax laws must be amended to level the competitive playing field for local brick-and-mortar stores that contribute to our state’s economy and collect the sales taxes already legally due, revenue that the state is being cheated out of.

Marlon Kimpson represents District 42 (parts of Charleston and Dorchester counties) in the S.C. Senate.

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