Franchot's mistake

Each year, Maryland businesses collect billions of dollars in sales and use taxes, while their Internet competitors fork over a minuscule amount. Comptroller Peter Franchot recently estimated that if the playing field were leveled and all sales were subject to the same 6 percent tax, Maryland would collect $198 million more in sales tax revenue.

That's a substantial amount, and it's expected to grow to more than $327 million annually within a decade as more people do their shopping on their computers and smart phones. That those e-commerce companies — including giants like — are essentially subsidized by their taxpaying, brick-and-mortar-bound competitors is grossly unfair and entirely unhelpful to the local economy.

But while Mr. Franchot recognizes the unfairness of the present circumstance, his recent report on the matter to Gov. Martin O'Malley is a bit shy on solutions. He notes that two flawed bills pending before Congress would be helpful but not allow the state to collect all that is due (falling at least $50 million short). And he suggests any attempt by Maryland to take action on its own would likely land the state in court.

"Our experience," Mr. Franchot writes, "leads us to conclude that the state should not pursue legislative remedies based upon the expectation of significant new revenue streams."

To which we can only respond: Poppycock.

Although Mr. Franchot appears to have accurately assessed the situation, he is far too easily scared off by the prospect of a fight. Maryland does have an opportunity to stick up for its retail community, but only if its leaders are willing to take a stand for the mom-and-pop small businesses that are threatened by a continuation of the status quo.

What Governor O'Malley needs to do — as other states such as New York have done — is to go after the companies that have a physical presence in the state. For instance, when someone purchases a product on Amazon or and that order is filled by an affiliate in Maryland, the sales tax could potentially be applied. As much as $26 million might be collected this way each year, according to the comptroller's report.

Amazon can argue that the actual sale was made out of state and the transaction is therefore exempt from the state's 6 percent sales tax. But that point of view won't necessarily prevail in court. Recognizing this, the online retailer has ended its affiliate relations in most states that have tried that tactic.

In the short term, such an aggressive effort by the state (assuming the industry responds in its customary fashion) could actually cost Maryland not only millions in sales tax collections but put Maryland-based affiliates out of business. That's regrettable. But unless states are willing to take such harsh steps, it's unlikely this grossly unfair situation is going to change.

Would it be better to look to Washington for help? In a perfect world, yes — and the Marketplace Equity Act and Main Street Fairness Act (both based on the streamlined sales tax and use agreement endorsed by some states — Maryland not being among them) have attracted numerous supporters. But it's hard to envision the current Congress passing anything that smacks of a tax increase; never mind that this is merely the closing of a loophole and the revenue goes to the states.

In other words, Washington is in a partisan stalemate on all matters related to taxes and tax reform. More pressure needs to be applied, and that means going after affiliates. If enough states took such action, there'd be little choice but to comply — and for e-commerce firms to cry out for a more permanent solution from Congress. They can't close affiliates in every state.

Mr. Franchot is clearly concerned that this would only lead to extended litigation and potentially reduce tax collections in 2012 as well. But in the longer view, it may be the only available strategy for fixing this deeply unfair situation. Why should Maryland retailers that pay their taxes, employ local residents and invest in communities face what amounts to a 6 percent price disadvantage compared with out-of-state companies that do none of the above?

Meanwhile, efforts to address Maryland's long-term budget deficit and create new jobs by investing more tax dollars in the building of roads, bridges and other infrastructure projects in 2012 are likely to require tax increases. Some in Annapolis are contemplating raising the gas tax. In the past, there's also been debate about broadening the sales tax, applying it to services instead of goods only.

However, raising any tax while simultaneously doing nothing about the tax-free status of out-of-state Internet sales only underscores the current inequity. It's a problem that will worsen unless Mr. O'Malley and the General Assembly are willing to act boldly and not be cowed by a bunch of high-priced lawyers.

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