Jewelry store at 824 7th St, NW in 1910. Photo posted by rockcreek.

Maryland lawmakers have proposed imposing sales taxes on certain Internet referral transactions. Currently, online retailers aren’t required to collect state sales tax unless they operate physical places of business in that state. People are supposed to calculate the tax themselves and pay it to the state government, but most don’t and many don’t even know about it.

Maryland’s bill wouldn’t change anything for consumers buying products. Instead, they’re trying to tax the referral fees that retailers like Amazon pay to sites that send traffic their way. If the referring site is in Maryland, and the customer is in Maryland, does that count as a sale in Maryland for sales tax purposes? New York passed a similar law which survived a judicial challenge by Amazon.com and Overstock.com.

There’s a bigger issue. It’s unfair for purchases online to be exempt from sales tax, while brick-and-mortar stores, already having a tough time competing with the Internet, have to pay the tax. For small purchases, most people don’t think about it, but it certainly affects behavior for large purchases. If you’re buying a $2,000 camera or a $10,000 diamond, you save a lot of money buying online. Meanwhile, camera stores are going out of business.

If physical retailers lose just because consumers prefer online, fine. Netflix has beaten the pants off Blockbuster by having a more efficient business model that created consumer happiness. Competition and innovation is good. But if government is creating a drag on one business but not a competing business, that’s unfair. Neighborhoods and downtowns benefit from lively retail. Our tax policy ought not push the other way.

Equalizing the taxes doesn’t necessarily mean letting states tax online purchases. Maybe we should eliminate sales tax entirely (it’s regressive, after all), and replace it with an income tax. Or we could cut sales taxes in half while applying the new, lower rate to online purchases as well.

Jewelry and camera stores have other problems dealing with online commerce as well. Most people won’t buy a diamond ring sight unseen from an Internet merchant. But many people do go down to their local jewelry stores, comparison shop various ring types and stone sizes, then head to New York or go online instead. Likewise, it’s helpful to hold a camera or lens and try it out. But then you can get an identical one online, often for less. The stores, meanwhile, get nothing in return from the online retailer.

Is the equilibrium state that eventually all camera and jewelry stores will disappear? Or they will condense to fewer and fewer stores to serve the remaining but shrinking number of people who won’t buy online? Will such stores one day start charging to see merchandise? That’s probably impossible. Will single companies eventually operate both online and offline stores, as B&H does for photo equipment?

Tagged: budget, retail, taxes

David Alpert created Greater Greater Washington in 2008 and was its executive director until 2020. He formerly worked in tech and has lived in the Boston, San Francisco Bay, and New York metro areas in addition to Washington, DC. He lives with his wife and two children in Dupont Circle.