Staff editorial: A taxing situation

As the old quip attributed to Benjamin Franklin says, "Nothing can be said to be certain, except death and taxes." Little has changed on the mortality front, but with a generation growing up in the age of Amazon and iTunes, many are accustomed to life without taxes — at least on items purchased digitally. Gov. Martin O'Malley wants to change that, but even if he isn't successful, it's possible the U.S. Congress will take action — a move this editorial board believes is preferred and long overdue.

There are two distinct issues in the matter: One is the fact online retailers generally don't have to apply sales taxes on purchases unless the customer lives in a state where the company has a "physical presence" — a warehouse, for example. The other issue is whether taxes should be applied to the sale of emerging digital products such as music, movies and games, or digital subscriptions to websites such as Netflix or blogs with premium content.

The proposal to tax digital items is essentially a response to the retail trend away from physical forms of media such as DVDs and CDs, and toward digital files on iTunes or Netflix. The only reason such items aren't taxed like their more-tangible brethren is because lawmakers have been slow to respond. O'Malley's proposal aims to join the 24 states and Washington that have already passed measures to collect such taxes. It is expected to garner about $5 million in revenue — a number that's sure to grow as digital items grow in popularity.

This editorial board believes taxing digital products is a natural extension of the current sales tax and supports the move as long as legislation is carefully worded to avoid unintended consequences. But the more pressing issue is that of taxing online sales in general — which will cost states nationwide an estimated $23.3 billion in 2012 — because the status quo reeks of unfairness. If you purchase a textbook at the Maryland Book Exchange, you can expect to pay a 6 percent state sales tax on the item. But customers can make the same purchase from Amazon without the tax. That's an unfair advantage, and on a larger scale, the issue transfers wealth out of Maryland — and interferes with the free market by acting as a bona fide subsidy for online retailers. Curiously, the best way to amend this unfair government intervention is with, you guessed it, government intervention.

O'Malley's plan to partially close the so-called Amazon loophole would require Amazon affiliate sellers in Maryland to collect a sales tax if they do more than $10,000 in business annually. So if a state company sells something through Amazon — with Amazon taking a cut of the profit — sales tax would be collected. But if Amazon itself sells the item there won't be a sales tax (even if it originally bought the item from a state company). Most transactions fall under the latter, more traditional category, so the long and the short of it is, even if O'Malley's bill passes, Amazon still won't have to collect sales tax on the majority of purchases in the state, and the company will probably just drop all of its Maryland affiliates — as it did in California after a similar measure was passed — which will hurt the companies in this state.

Which is why we agree with Comptroller Peter Franchot's stance that the issue can — and should — be addressed at the federal level. States can't tax most online transactions because of a 1992 Supreme Court ruling, and it will take congressional action to make taxing all online sales plausible. O'Malley's plan would even the playing field between Maryland businesses that engage in Internet commerce and those that don't — but maintain the built-in advantage enjoyed by online retailers like Amazon. The playing field should indeed be leveled, but for all businesses.

Instead of crafting a bill that would likely have an adverse effect in Maryland, state legislators should instead throw their support behind measures in Congress that would enable states to tax online sales. If not, the problem will no doubt persist on the state level.