You may be surprised to learn that, when you buy a TV online, you owe the same state sales tax that you would pay if you had purchased the TV at the appliance store on Main Street. Many online sellers don’t collect the state sales tax, and many purchasers don’t pay it, even though they owe it. This creates an online sales tax loophole.
Main Street retail stores are up in arms about the unfairness of this online sales tax loophole. As William F. Buckley Jr. wrote, “The mattress maker in Connecticut is willing to compete with the company in Massachusetts, but does not like it if out-of-state businesses are, in practical terms, subsidized; that’s what the non-tax amounts to. Local concerns are complaining about traffic in mattresses and books and records and computer equipment which, ordered through the Internet, come in, so to speak, duty free.”
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Governors and legislators are up in arms, too. According to the National Conference of State Legislatures, next year this online sales tax loophole will cost states $23 billion in avoided taxes. For example, in Tennessee the maximum sales tax is 9.75 percent. Therefore, a $400 TV could be $39 cheaper purchased online than it would be on Main Street. Tennessee could use this lost sales-tax revenue to continue to avoid imposing a state income tax. Wyoming might use the revenue to lower its property-tax rates. Other states might use the lost revenue to reduce tuition at state colleges or to reward outstanding teaching.
If governors, legislators, and Main Street businesses are up in arms, then why haven’t states closed a loophole that subsidizes online sellers at the expense of Main Street retailers and subsidizes some taxpayers at the expense of other taxpayers?
The short answer is: Closing the loophole has in the past been too complicated. If you buy a TV on Main Street, by law the seller collects the tax and sends it to the state. If you buy the TV online, you are supposed to pay the sales tax yourself, either on your annual state return or on a separate form required by the state. Of course, keeping track of all of one’s online purchases is something even an accountant might have a hard time doing, so many Americans never pay their sales taxes on online purchases — even though they owe them.
Then why don’t state laws require online sellers to do what Main Street sellers do — collect the sales tax when the purchase is made and send it to the state? Because in 1992 — when technology for businesses to compute and collect taxes was not nearly as advanced as it is today — the U.S. Supreme Court said that without congressional approval, states could not require out-of-state businesses to collect sales taxes because this created too much of a burden on interstate commerce. But, recognizing the unfairness such a loophole would create, the Court invited Congress to solve the states’ problem.
To do just that, ten U.S. Senators are introducing today the Marketplace Fairness Act, bipartisan legislation offering states two ways to make it simple for online sellers to collect state sales taxes. Our proposal exempts online sellers with annual sales of less than $500,000 from collecting any tax at all. Our bill is a rarity for Washington, D.C.: It is only ten pages long.
Some — mostly taxpayers and out-of-state businesses who enjoy being subsidized by the loophole — argue that we would create a new “Internet tax.” This is wrong. We are talking about an existing state tax that purchasers already owe. And it is a tax on all sales, not only Internet ones. Of course, our legislation would not affect the state tax bills of taxpayers in five states with no state sales tax.
Over the last 20 years, many states and online sellers have agreed voluntarily to close the online sales tax loophole and to stop subsidizing some businesses and some taxpayers at the expense of others. States and Main Street retailers are now reminding Congress that, under our nation’s Constitutional framework, states should have the right to decide for themselves whether to collect — or not to collect — their own state sales taxes. As Republicans who believe in states’ rights, we agree.
— U.S. Sen. Mike Enzi was mayor of Gillette, Wyo., and U.S. Sen. Lamar Alexander was governor of Tennessee.
Here is a better idea: make purchasers pay the sales tax rate at the location of the seller. This would be a much simpler way for businesses to collect this tax.
This way, states could compete for businesses with their sales tax rate. If they want to bring in more businesses, they can offer a competitive tax rate. This seems more logical because it would be the same as me driving to another state and buying something.
Why is my online sales tax tied to my address? When a normal sales tax is not? That is historically not how sales taxes work. What if I am on vacation and purchase something online? What if I am deployed? Why would I have to pay the sales tax where my house is located by I am not?
Exactly. Destination based sales tax makes no sense and has no analog in the 'real world' of brick and mortar commerce either. These politicians are incredibly ill-informed of economic realities. Try escaping from the beltway bubble from time to time!
Indeed. I have had a couple of online businesses attempt to collect sales tax from me because the city in my mailing address has a sales tax. This despite the fact that my home is physically miles outside of the city limits. Only the USPS connects me with the city, and apparently that is sufficient to tax me.
Gee, thanks Republican senators (i.e., ruling class elite) for figuring out how to tax us middle class schlubs some more. Sorry your states have such a need for our hard earned money. Maybe it's because your state governments have gotten a little big and you could consider cutting some things rather than digging deeper into my pocket every time you see a shortfall? No? I didn't think so.
How much do you want to bet these two are some of the same Republican senators that Jim DeMint just wrote about in another article here on NRO who are going along with Democrats to continue increasing government spending nearly every chance they get even though we're broke?
It's going to come down to the little guy saving this country or it's not going to get saved, because our Republican "leaders" are part of the problem, even after the clear message sent in 2010. The Washington D.C. spending/power drug is too much for them.
It is time to look at this issue in light of the Imports-Exports clause of the Constitution. Precedent would indicate that use taxes cannot be assessed on internet purchases of goods originating in foreign countries. It would be obviously discriminatory to exempt these transactions from use tax but tax interstate transactions. Thus, the applicability of the Import-Export clause to interstate commerce can be finally re-established, as was originally intended. So the proposed solutions Congress is contemplating are moot, as all use taxes are unconstitutional and restrain trade. Our framers understood that competition among the states was paramount. Maybe this is a way this principle can be re-established.
In our guts, we know use taxes are wrong. Now we can see exactly why, as our framers had attempted to establish.
Anyone who thinks that just because it's 2011 it must somehow now be 'easy' for retailers to understand the intricacies of 8000 sales tax jurisdictions in this country is ill-informed. No surprise this was a politician's idea. The only sensible solution is 'origin based' sales tax rules where the purchaser pays the prevailing sales tax rate of the shipping origin. This creates a fantastic realm of competition for the states - opportunities for differentiation in their attraction of businesses.
A retail store in Park Ridge, Illinois (for example) only has to worry about the sales tax for the city (Park Ridge), the county (Cook County), and the state (Illinois). But if an Internet retailer has to collect the tax, it will have to maintain up-to-date tax information for every state, county, and town in the nation! That would be a bookkeeping and computer programing nightmare. How would Amazon, for example, know when Podunk, Iowa changed its tax rate? How much would prices have to go up, nationwide, to cover the cost of the compliance?
Yes, let's let the greedy hand of government stick its dirty fingers into the most successful, booming area of American productivity.
Collecting online sales taxes from out-of-state businesses would introduce crippling tracking burdens on small time retailers, and provide incentives for on-line businesses to move off-shore where it would be difficult to enforce any tax collection scheme.
From the consumer's point-of-view the lack of sales tax is made up for by the expense of shipping. Online retailers aren't beating brick-and-mortar retailers because of the sales tax difference, they're beating them due to convenience, lower base prices and lower overhead.
Next, on principle, our governments at the state and federal levels don't have a revenue problem, they have a spending problem. I say no new or expanded taxes on principle because our governments have proven themselves unable to steward what they have wisely. They don't deserve one red cent.
There is an easier solution that does not require states to enforce their taxes on out of state shopkeepers. Rather than have millions of retailers acting as tax collectors, states can adopt a replacement tax, at a much lower rate, on credit card, debit card and check charges. These can be collected easily by the bank card companies (who would be glad to have the transaction fees that retailers get for tax collection). Then, local sales taxes could be assessed on cash transactions and even these could be eliminated by assessing ITMs and check cashing businesses instead.
The electronic transaction tax can be assessed on every retail transaction accepted by a retailer with a zip code in the state or initiated by a cardholder with a zip code in the state. The tax could be halved if the card holder or retailer is from another state that assesses a similar charge.
It gets around the interstate commerce question because the bank card company, regardless of location, has established a permanent business relationship with either the retailer or the cardholder, so the bank card company is "doing business" in the state and may be directly enforced against. The tax amount could be noted on the sales receipt but the retailer would never have to hold the money in trust for or transmit the money to the tax collector.
Sales and use are transaction taxes. Wouldn't it be better and more fair to levy it at the most convenient place, the same place where the retailers collect most of their money?
Great comment. My solution is similar. I would have the CC Processors collect and remit directly to the States (States pay related fees). States get instant funds, no privacy issues, saves businesses $$ with no fees and lower adm. costs, and this system would work for B&Ms as well as online. External Link
Why the H*** is NRO hosting this? Is the policy now to publish anything any Republican politician submits? As NR's own contributors have pointed out repeatedly, and as slight9 points out below, permitting taxation only by the seller's jurisdiction is far superior in every way conservatives (should) care about.
As the senators point out, this is not anything new. The best solution would be for people to obey the existing laws and pay the sales tax when they purchase something online. Or is obeying the law synonymous with being a liberal elite?
This isn't really "destination based" since a virtual store is being set up on your web browser. The company has a virtual, temporary presence in the state of the purchaser. It's like a door-to-door salesman except it's automated and you decide when he makes a "visit." This bill is about making the law in this area "Internet-aware."
This isn't a "new tax" because you are supposed to be paying it anyway.
What are the counterarguments to the origin-based sales tax, which is really simple to implement? Do some states oppose origin-based rather than destination-based sales tax because the revenue would be distributed differently? (More dough would go to the states with the bigger internet retailers.)
The argument is that big internet and mail-order retailers will flock to the states with the lowest sales taxes. Since few individuals decide where to live based on sales tax rates, a destination-based tax is much more difficult to escape. Of couse, many of us see that as an argument for, not against, an origin-based tax: it forces states to compete.
So here we have two former politicians complaining about the loophole provided by Internet sales. Well gentlemen, what about the byzantine "loophole" called the tax code (i.e., state or federal)? This code is regularly manipulated by politicians to give the appearance of tax relief, but in actuality, is used to circumvent the wishes of their constituents and enrich cronies. Let's eliminate that “loophole” first.
You and your ilk have, through the decades, cultivated a thoroughly corrupt view in which all forms of financial assets and transactions are yours to tap whenever needed. There is no concept remaining whatsoever of financial freedom and privacy. You have enabled governments to grant themselves an unlimited "portfolio" of tax sources over which to spread an ever rapacious need for revenue. The only limit is your creativity. No longer can citizens today fight over what is to be taxed. The only question now is how much – but even then, citizens are at a steep disadvantage.
The complexity and diversity of modern tax sources obfuscate exactly how much personal income and wealth is confiscated by the government. This obfuscation is deliberate and makes it impossible for citizens to fight over tax levels. If citizens are successful in one area, you act quickly to make up the revenue elsewhere. Or perhaps you can point me to a state that actually spent less year-over-year for more than one fiscal cycle?? I will avoid asking about embarrassing debacle that is the federal government. In the end, taxation is a shell game that politicians like yourselves are masters at.
So do Internet sales hurt a state’s ability to collect revenue? Absolutely not. States have multiple sources of revenue on tap. Revenues lost to internet sales could easily be made up elsewhere or – brace yourselves for the sacrilege – through budget cuts. We are not talking large percentages of a state’s budget. What Internet taxation is really about is government control. Your colleagues in the state legislatures can't stand the fact that residents can so easily avoid their enacted taxes – however small they may be. From their perspective, every potential source of tax revenue is their God-given right. So when state residents, play the tax code shell game as well as you do, it’s only natural that you want to eliminate that ability that pronto. The game must always be rigged in the politician’s favor.
Also, do Internet sales provide an unfair bias against in-state businesses? Again, no. Successful businesses adapt to changing competitive climates. In other words, in-state businesses can offer their products on-line to residents of the other 49 states. If they choose not to, then they must absorb the consequences of that decision. Mostly importantly, though, businesses that offer Internet sales bring additional jobs and revenue to the state where they reside. These jobs and revenue, in turn, create more tax income. One would think that Republicans like yourselves would be trumpeting this type of pro-business view and not crooning for legislation that enables greater taxation and regulation.
We as conservatives should be pushing for legislation that promotes individual financial freedom and privacy – something which our Founding Fathers were willing to die for. It pains me to read other posts here which offer detailed alternatives on how to tax Internet sales. Is it because we are not being strangled enough that we need to feed our governmental leviathan further?
A "loophole" is citizens availing themself of an unintended consequnce of a law or rule. what the authors describe is simply noncompliance by citizens of the use tax imposed on them by their state.
The proper legitimate solution would be to prosecute the citizens evading the states' use tax law.
But that's "too hard" for the modern politician. They crave POWER structures whereby they can place a choke hold on various branches of our society whereby they capture the most citizens and do so indirectly, covertly.
Very similar to the current design of employer income tax withholding. It's easier to clamp down on one employer than hundreds of employees.
But we are free Amercians. If we violate a law, prosecute us. If we don't LEAVE US ALONE.
Making it easy for government is not a valid excuse to change the common law tenets of interstate nexus.
