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Big Businesses and Government Joining Forces to Tax Out-of-State Sales


It looks like the Senate is about to bless yet another unholy alliance between Big Government lawmakers and Big Business. As the Wall Street Journal writes today, the Senate is scheduled to vote on a bill to tax out-of-state sales done on the Internet, which “would fundamentally change interstate commerce.” As always, the senators won’t have much time to read what they are voting on, as the Journal explains:

For Senators curious about what they’re voting on, it is the same flawed proposal that Mike Enzi (R., Wyo.) introduced in February. It has been repackaged to qualify for a Senate rule that allows Majority Leader Harry Reid to bypass committee debate and bring it straight to the floor.

Mr. Enzi’s Marketplace Fairness Act discriminates against Internet-based businesses by imposing burdens that it does not apply to brick-and-mortar companies. For the first time, online merchants would be forced to collect sales taxes for all of America’s estimated 9,600 state and local taxing authorities. [...]

The Enzi plan would require a centralized tax collector for each state or for a group of states that would gather both state and local levies from the online merchants. His office concedes that could still mean 27 or more different auditors of a Web-based business—which is better than 9,600 but hardly qualifies as simplicity.

With most state lawmakers facing large budget deficits, we shouldn’t be surprised by their eagerness to start collecting a new form of sales taxes. And we shouldn’t be too surprised either that Congress is considering blessing this multistate compact, which would permit states to impose such taxes on interstate commerce. When they do vote for this legislation, Congress will unfortunately be ending a 15-year-long debate about protecting consumers, and impose an unseemly tax cartel on the American people.

In spite of its name, the Marketplace Fairness Act (and any bill of this nature) is only “fair” to those who believe that the government should be able to collect the maximum amount of tax revenue from citizens, and that consummers should not be able to decide where to shop based on tax levels. Under this new regime, consumers won’t ever be able to escape from the tax rates imposed by their state officials, no matter where they shop.  

Adam Thierer and I have written about this fairness argument in the past. We specifically addressed the idea that this regime would be fair because it would “level the playing field” between online and Main Street retailers:

“Main Street”  vendors—whether the mom-and-pop retailers or larger companies, such as Wal-Mart or Target—are clearly burdened with significant tax collection responsibilities. The difference  in tax treatment is what animates Senator Durbin’s “Main  Street Fairness Act.” But fairness cuts many ways. Requiring out-of-state vendors  to collect sales taxes on behalf of jurisdictions where they  have no physical presence remains unfair and unconstitutional,  especially when there are other ways states could promote fairness. One way to level the playing field would be to cut  or eliminate sales taxes on in-state vendors. Another alternative would be a national Internet sales tax that would avoid  the complexity problem by imposing a single rate and set of  definitions on all vendors. But that solution opens the door to  a new federal tax base, which would grow to be burdensome  in other ways at a time when American consumers and companies are already over-taxed. 

Our favorite option is one that would promote tax competition. 

The third and best option might be to clarify tax sourcing  rules by implementing an “origin-based” tax system. In  this system, states would tax all sales inside their borders  equally, regardless of the buyer’s residence or the ultimate  location of consumption. Under that model, all sales would  be “sourced” to the seller’s principal place of business and  taxed accordingly. This is, after all, how sales taxes have traditionally worked. 

A Washington, DC, resident who buys a TV in Virginia, for  instance, is taxed at the origin of sale in Virginia regardless  of whether he brings the TV back into the District. Each day  in America, there are millions of cross-border transactions  that are taxed only at the origin of the sale; no questions are  asked about where the buyer will consume the good. Policy  makers should extend the same principle to cross-border sales  involving mail order and the Internet. Under this approach,  Internet shoppers would pay the sales tax of the state where  the online retailer is based.

An origin-based sourcing rule would have many advantages over the “destination-based” sourcing rule that state officials are pushing. It would eliminate constitutional concerns  because only companies within a state or local government’s  borders would be taxed. An origin-based system would do away with the need for prohibitively complex multistate collection arrangements such as the SSTUA because states  would tax transactions at the source, not at the final point  of consumption. 

An origin-based system also would protect buyers’ privacy  rights, eliminating the need to collect any special or unique  information about a buyer and to use third-party tax  collectors to gather such information. Additionally, it would  also preserve local jurisdictional tax authority whereas a  harmonization proposal like the SSTUA plans would create  a de facto national sales tax system that would exclude  local governments.

Ramesh wrote about the origin-based tax too, here.

Adam and I have wrote a fairly comprehensive paper about this issue several years ago, which you can find here

I will leave the conclusion to the WSJ’s editorial board:

Some of our conservative friends are backing this Internet tax raid as a way to raise revenue to avoid more state income-tax increases. More likely the new revenues will merely fund larger government. Republicans who are realists about government would be wiser to join Senators Ron Wyden (D., Ore.) and Kelly Ayotte (R., N.H.), who are leading the opposition.

The whole thing is here. And here, here, and here are a few good pieces by CEI’s Jessica Melugin on this issue. 


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