US Senate allows states to enforce sales tax online

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These days online purchases are commonplace, yet Maryland's budget and tax system are still playing catch-up. The problem is that online retailers who do not have a physical presence in Maryland (such as a store or warehouse) are not required to collect sales tax. This puts the burden of payment on customers (who rarely pay), disadvantages local businesses, and forces Maryland to under-invest in education, healthcare, and public safety.

On Monday, the U.S. Senate took a step forward and passed legislation empowering states-including Maryland-to collect sales taxes from online purchases. This includes books, clothes, recreation equipment, and all the other stuff we pay Maryland sales tax for when we buy it in a physical store. Technically the bill does not create a new tax; rather it allows states to enforce collection of a tax which is now legally due, but rarely collected. 

Maryland and Virginia both counted on this authority in their recent transportation revenue packages. In Maryland’s case, the transportation bill provides that if Congress acts to allow states to collect Internet sales tax, then two things happen:

• 4 percent of all sales tax revenues would be allocated for transportation purposes (currently all sales tax revenues go into the general fund to pay for investments such as education, healthcare and public safety).
• The new sales tax on gasoline (which is in addition to the existing 23-1/2 cent gas tax) will be capped at 3 percent. If Congress fails to act it will rise to 5 percent. This sales tax on gasoline all goes for transportation purposes. Either way, this change would be phased in gradually over four years.

However, the federal legislation now has to pass the more conservative U.S. House of Representatives, which will be a tougher test than the Senate was.  A majority of U.S. representatives would need to vote for something that looks like a tax increase, where they get the blame, but state officials get to take credit for allocating the proceeds. Until now, this measure – meritorious as it is – has not made much progress in Congress.

Yet the ability to tax internet sales is unequivocally the correct economic and financial policy. Internet commerce is no longer a fragile new enterprise. It is a major player in the retail industry. It no longer needs the advantage of a de-facto sales tax exemption to grow and thrive (if it ever did).

And it is not fair to physical retail stores, or to internet sellers with physical locations in Maryland (from Target to your local florist). Under the current arrangement, they have to collect sales tax, but compete with out-of-state internet sellers who don’t.

So, however difficult the politics are, Congress should pass this bill.

Maryland’s allocation of these receipts for transportation, however, might endanger funding for general fund needs in the future. That means local schools, higher education institutions from our county community colleges to the University of Maryland, health programs, and police departments.

When and if Maryland starts collecting tax on all Internet sales,  legislators will need to keep a close eye on the receipts, to make sure that education, healthcare, and other functions funded from general revenues get their fair share.