Throughout America’s recent economic crisis, state political leaders from across the nation have struggled to maintain sufficient funding for core services while balancing their state budgets. Despite the challenges posed by this situation, there has been very little discussion about a simple way that the federal government could step in to allow states the freedom to raise up to $30 billion in additional revenue over the next three years. This federal action would not involve hikes in existing tax rates nor would it necessitate the imposition of a new tax — rather, it would merely close a tax loophole that currently allows online retailers, such as Amazon.com, to avoid paying sales tax to almost any state government. By rewriting a few tax law provisions, Congress could eliminate this unnecessary subsidy for online sellers that puts traditional businesses at a competitive disadvantage and costs the states hundreds of millions of dollars in annual revenue that could be used to shore up failing schools, reduce college tuition or expand health care programs for disadvantaged citizens.

As it stands now, most states are unable to collect sales tax from online retailers because of a 1992 Supreme Court decision that exempted businesses from paying the tax in states in which they lack a physical presence. Although purchases made from these retailers are still technically subject to a “use tax” which consumers are supposed to pay at the end of every year, very little revenue is actually generated this way since enforcing the personal payment of the use tax is nearly impossible. For many years this was of little importance since major retailers operated stores and warehouses in nearly every state, but it has become a problem with the advent of companies such as Amazon, NewEgg.com and Overstock.com that have online-only business models. E-retailers now make 4.4 percent of all retail sales, according to a recent Goldman Sachs report, and are projected to increase their sales share to 14.6 percent by 2020. Amazon has led the charge with sales revenue that totaled $24.5 billion in 2009 and that is expected to grow by almost 31 percent in 2010 at a time when retail as a whole is struggling.

Shielding these immensely profitable online retailers from sales tax causes two major problems. First, it eats away at state revenues as more consumers take their shopping online. Through 2012, this is expected to deny U.S. states over $30 billion in revenue according to a study performed by the University of Tennessee. The Commonwealth of Virginia, specifically, will lose out on an estimated $341 million throughout the time frame of its recently adopted biennial budget. As a result, that money had to be subtracted from the budget through draconian cuts to education, law enforcement and social services. Secondly, the current tax arrangement puts local businesses and traditional retailers at a disadvantage since they have to factor sales tax into the prices of their products, which causes them to be higher than those found online. With local businesses already struggling to draw customers away from the convenience of shopping in their own homes, tax provisions that favor large online retailers will only make it harder for local economies to bounce back from the recent recession.

Thankfully, the Supreme Court ruling that created these issues also provides for a possible solution. In its decision, the Court stated that Congress “is … free to decide whether, when and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.” Because there is no legal distinction between online orders and mail orders, and use taxes are merely sales taxes that are not collected by retailers, there is no reason to believe that Congress is constitutionally prohibited from acting. What must follow is for Congress to insert into the tax code a provision explicitly allowing states to require retailers to collect sales tax on all Internet sales regardless of whether the businesses in question have a physical presence in the state or not. In doing so, Congress would take a step toward ensuring that tuition increases and social spending cuts are no longer the only way for states such as Virginia to survive during difficult economic times.