Should we tax Internet sales

Tom Keane

Saturday, April 20, 2013 | 2 a.m.

Greed is the motive behind government officials’ desire to tax Internet transactions. Fairness is the reason that causes many others — including me — to come to the same conclusion: We should treat online retail purchases the same way we treat those made from the corner store.

Internet sales aren’t subject to the sales tax because the legal world hasn’t caught up with the real one. In trying to figure out when a company might be subject to local tax rules, courts long ago decided the test would be whether the business had a “physical presence” in the state. That test created an exemption for mail-order companies and the like, but they were a trivial part of overall retail sales, so few cared. But then the Internet came along and, suddenly, a small exception became a giant loophole.

Nevertheless, those were the rules: no sales tax on items purchased from e-tailers. Or so we all seem to believe. In fact, we really are supposed to pay a tax. It’s called a “use” tax, and it looks and smells just like a sales tax — and, at 6.25 percent, it’s the same rate as the sales tax in some states. But rather than a retailer collecting the money and sending it to the state, you, the consumer, are supposed to send it off yourself.

Hands up if you’ve ever done that? I thought not. Me neither. The Department of Revenue doesn’t enforce the use tax. It’s far easier to go after a relative handful of retailers for a sales tax than it is to send out inspectors to track all of those UPS packages being delivered door-to-door. (Still, I half expect this admission means the next sound I hear is a Department of Revenue agent ringing the bell.)

So it’s been a pretty good life for us consumers and an even better one for Internet retailers, which have seen sales soar for all of the reasons they tout — convenience, product selection, accessibility — and the one they don’t: a built-in tax discount. Buy a television online for $2,000 and a Massachusetts resident saves $125 in tax. Eventually, as they say, it adds up to real money.

The good life is about to end.

Legislative proposals are now making their way through Congress that would set up a new system of rules for Internet sales. Last month, New York’s highest state court broadened the “physical presence” rule to include many online operations. Meanwhile, Amazon recently opened offices in Reading and Cambridge, Mass. That was just the hook the Commonwealth needed and, indeed, come November and the start of the holiday season, Bay State residents buying from Amazon will be paying a sales tax.

That’s the way it should be.

Local officials will sing the praises of retailers, and for good reason. Thriving stores make for thriving communities. They create jobs, especially entry-level positions that cater to the young and less-skilled. Strong retail districts bring in residents and drive out crime.

But praise is easy; retailing is tough. Rents are high, “shrinkage” is rampant, unpredictable weather and increasing gas prices play havoc, and local regulations can be crushing. Look at the saga of Restoration Hardware, which spent millions to renovate the historic but crumbling New England Museum of Natural History. The reward for its effort was harassment from city inspectors who delayed its opening by weeks. Or how about the everyday annoyances: meter maids aggressively ticketing customers, special city permits to use a Dumpster, neighborhood nabobs demanding signs no one can see.

Still, the worst insult is the unfair competition from the Internet. Shoppers roam retailers’ aisles, play with the goods, and then use their smartphones to order them online. I don’t blame the customers — they’re acting rationally to save a buck — but I do blame a crazy tax system.

Here’s a solution that’s fair to all: Broaden the sales tax to cover everyone — online and on the street — while at the same time cutting the rate across the board (by my reckoning, to somewhat under 6 percent). It’s a three-way win: the state ends up with the same (or slightly more) money in its coffers, consumers benefit from a lower tax rate, and, most important, the brick-and-mortar stores that invest in our communities get a fighting chance.

Tom Keane writes for the Boston Globe.