By Scott Hauge, President, Small Business California

As the president of Small Business California, I believe in the free market. And I also believe that what makes the free market work is that everyone plays by the same rules.

Unfortunately, a tax loophole in our state is being exploited which hurts small businesses and creates a competitive disadvantage in the marketplace. Out-of-state, online-only vendors don’t collect state sales taxes at the point of purchase like brick-and-mortar stores are required to do. This loophole has given out-of-state, online-only retailers an unfair competitive advantage over retailers in our own community.

As a result, the brick-and-mortar small businesses that employ our family members, participate in our communities and are critical to our economy’s recovery, are operating at a loss and jobs are at risk.

At its core, this is an issue of basic fairness. California businesses are being priced out of the marketplace because they are following the law and collecting the sales tax as required by law. All the while, online-only retail giants like are refusing to collect the sales tax by exploiting a loophole and passing on the liability to remit the sales tax to their consumers, many of whom have no idea the compliance burden falls on them to track and issue payment.

This is not just burdensome to consumers but also to small businesses that also must track and remit the sales tax on items they purchase. The current law adds even more bureaucracy and requirements on already struggling small businesses.

The result has meant that consumers can buy online the same products that local small businesses sell, but while California businesses are required to collect sales taxes, out-of-state, online-only retailers abuse an outdated system to get around collecting the sales tax and offer an artificially lower price. That’s not fair, not right and not the way the marketplace should work.

Simply stated, this is no way to do business in a 21st Century economy.

Fortunately, our state has an opportunity to close the loophole, modernize the system and ensure small businesses are able to compete.

Our elected representatives can support legislation like Assembly Bill 153 by Assemblymember Nancy Skinner that will require out-of-state, online-only retailers to comply with the same requirements to collect sales taxes that California businesses must follow. This will ensure the fair and equitable collection of sales taxes by every business and in the process, provide a critical infusion of revenue for our state and local communities that are struggling to close deficits without raising taxes.

In fact, it is estimated in a recent study by the University of Tennessee that over $3.5 billion in uncollected state and local revenues in 2011/12 will result from this loophole that advantages these out-of-state businesses.

Small Business California is working to create a better business environment in our state, and this loophole does the opposite. However, closing it will level the playing field and California’s small businesses stand to gain. Additional revenue will also be collected by enforcing an existing tax equally on all businesses rather than by raising taxes, and it ensures that local businesses are on a fair playing field with out-of-state, online-only retailers.

It’s time to ensure our businesses are protected from unfair tax policies. It’s time our elected officials stand up for California employers. It’s time we all play by the same rules.

At Small Business California, we believe that a sale is a sale is a sale whether it is made online or at the store. And we believe that establishing a common set of rules will benefit everyone – the retailers, consumers, economy and state.

Especially during this time of economic recession, we need to be helping, not hurting, California small businesses. The state legislature now has the chance to do just that. Let’s have one set of rules that applies to everyone, regardless of whether the sale is made over the Internet or on Main Street. That’s what is right and that’s what will help get our economy growing again.