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Morici: It's Time to Start Taxing Online Sales

NEW YORK ( TheStreet) -- The Senate recently passed a bill that would require internet retailers to collect sales taxes on behalf of local governments. This bill has flaws that could be fixed in the House, and should be passed.

I don't like the idea of the state and local governments collecting more taxes -- they know no limits to their capacity to tax and squander our hard earned dollars -- but the current situation is unfair and bad economic policy.

In 1992, the Supreme Court held that states did not have the power to levy taxes on on-line sales, unless the retailer has a physical presence in their state. Large retailers, like L.L. Bean, routinely charge the appropriate state taxes where they have a store or warehouse but not on sales in states where they do not.

Main Street retailers complain this places them at an unfair disadvantage -- and they are absolutely correct. No business would like the government giving a 5% price advantage to out of state competitors.

However, small retailers behave as if requiring internet retailers to charge sales tax would be a salvation for their flagging fortunes -- it wouldn't be.

Most local retailers, competing with internet businesses and big box stores, lack the scale to offer the variety of products an increasingly diverse American population demands, and the scale to get favorable prices at wholesale.

Taxing internet sales would make this problem worse by consolidating online competitors. The online bookstore in Tuscaloosa is much less menacing to the small bookstore in Boston than (AMZN - Get Report). However, the Senate bill would drive out the Alabama retailer and enlarge giants like

The Senate bill would require all retailers with more than $1 million dollars in sales to collect and remit sales taxes to every state and local jurisdiction. That would require coding each sale by zip code and remitting to the states the appropriate taxes -- those often vary not just by state but also city and county and by products covered.

In the end, local vendors would have to rely on software or services comparable to the payroll services that now cut paychecks and remit withholding taxes on income, social security and unemployment insurances to state and local governments.
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