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Wal-Mart's Jet.com Buy Puts Online Sales Tax at the Forefront

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This month, Wal-Mart announced plans to acquire e-commerce start-up Jet.com for $3.3 billion in the largest ever buyout of a U.S. e-commerce business. Wal-Mart should give itself a Smiley-the retailer's iconic happy face indicating a cost savings - and slash its budget for lobbying Congress to expand online sales taxes.

The deal undercuts Wal-Mart's argument that the lack of online sales taxes allows competitors an "unfair" advantage in the marketplace. In fact, it illustrates that large retailers believe bigger distribution networks for faster delivery to customers and a strong online presence, is more of a competitive advantage than the lower prices achieved by avoiding sales tax obligations.

How Wal-Mart will handle tax collections from purchases at Jet.com has not been released, but it is likely Wal-Mart's lobbyists will be in the awkward position of demanding an end to the online sales tax "loophole," while the company simultaneously chooses not to take advantage of it.

States can only collect sales tax from companies with a physical presence, like a store or warehouse, within their borders. The Supreme Court's 1992 Quill decision enshrined this manifestation of "no taxation without representation," preventing states from taxing companies in other states that happen to sell to their residents.

But state politicians seeking to fill tax coffers are petitioning Congress for expanded taxing authority. Specifically, they would like to reach outside their borders and collect sales taxes from companies that have no physical presence in their states. Never mind that these companies have no political voice in those states and don't benefit from the public services those taxes fund.

Moreover, compliance costs for calculating for almost 10,000 distinct tax jurisdictions, each with its own base, rates, and tax holidays, would prove fatal for many small and mid-sized online sellers. State officials also seem nonchalant about their plan's detrimental effect on interstate tax competition and the free flow of goods the Constitution's commerce clause was written to protect.

Joining state sales tax enthusiasts on Capitol Hill are lobbyists for big box retailers like Target and Best Buy-in addition to Wal-Mart. Their stores trigger sales tax obligations in all 50 states, so they feel they're at a competitive disadvantage relative to online retailers, which don't face those same tax liabilities.

If the thought of Wal-Mart, the world's largest retailer, needing the federal government to protect it from folks selling hand-knitted socks on eBay seems absurd, Wal-Mart's Jet.com purchase only makes it more so. It's hard to imagine Wal-Mart will forgo all the advantages of fully integrating Jet.com just to preserve the latter's current advantage of paying sales tax in only seven states. To do so, would deny Jet.com access to Wal-Mart's warehouses and stores in all 50 states, as that would trigger sales tax obligations for all Jet.com purchases. It's more likely Wal-Mart will sacrifice the tax advantage of Jet.com's small physical footprint in order to take full advantage of the parent company's vast distribution network to get customers what they want faster with less hassle.

Wal-Mart wouldn't be the first to take this approach. Amazon.com, the number one online retailer in the U.S., has come to the same conclusion. For years, Amazon opposed expanded sales taxes online, but then reversed its position as it changed its strategy from a limited physical presence in only five states to distribution warehouses all over the country to offer faster delivery and even same-day service in some areas. Amazon now collects sales taxes in 28 states and on a majority of the U.S. population.

Amazon's continued support for online sales taxes also creates a market for its tax software to help mom-and-pop online sellers comply with burdensome calculating and remitting requirements across the nation. Amazon has much to gain from government intervention and is therefore unlikely to reverse course again.

In the bigger picture, online retail sales continue to grow-10.6 percent in the first half of 2016. Therefore, inequities in the way online sales are taxed may need to be addressed. But let's not forget, expanded sales taxes mean more bureaucracy on the Internet, higher costs for taxpayers, and could even be the death nail for smaller sellers-an unacceptable price to pay to end a tax policy that its critics can't even be bothered to exploit.

The best solution would be an origin-based approach that requires online retailers to collect sales tax according to the point of purchase, not the residence of the customer, like their brick-and-mortar counterparts do. This system treats all types of retailers the same, allows states to collect only from within their borders, preserves healthy tax competition among states, and alleviates the costly compliance burden for companies.

Now there's an idea Wal-Mart lobbyists might want to embrace.

Originally posted at RealClear Markets