Politics & Policy

Without Representation

The founding battle cry of the United States of America was “No taxation without representation!” Senator Mike Enzi (R., Wyo.) and Senator Dick Durbin (D., Ill.) propose to challenge that with the misnamed Marketplace Fairness Act of 2013, a sales tax for Internet transactions, which would empower states and localities to impose sales taxes on retailers over which they have no legal jurisdiction.

Sales taxes are collected and remitted by retailers at the point of sale. When retailers at the Mall of America make a sale, they collect such taxes as are due to the state of Minnesota and the city of Bloomington, and send them to the appropriate agency. Whether the sale is made to a shopper from New York City (sales tax 8.875 percent) or a shopper from Prineville, Ore. (sales tax 0.000 percent), the sales tax is precisely the same, because the tax is calculated at the point of origin. The new tax plan under consideration would set that longstanding arrangement on its head, to the detriment of Internet-based retailers and consumers alike: Retailers would be forced to track the place from which an online consumer is making a purchase, calculate the applicable state and local sales taxes, collect them, and then remit them to the appropriate agency — and, in the process, keep track of the eccentricities of the nation’s 9,600 or so taxing jurisdictions.

This would also rob retailers of political representation: If Bloomington decided to double its sales tax, the retailers of the Mall of America, the mall’s owners, local employees and managers, local business partners, and local consumers would have an opportunity to challenge that through the democratic process. But if New York City can impose its tax rates on retailers hither and yon — including on tiny enterprises making a few bucks on eBay — it can do so while those retailers are effectively disenfranchised. 

In many jurisdictions, residents who buy certain items out-of-town or out-of-state owe their home authorities a “use tax,” which is like a sales tax except in that it is the buyer’s duty to remit the necessary funds. As one might imagine, relatively few consumers go out of their way to remain in strict compliance with such taxes, and local authorities find them difficult or impossible to enforce. The reasonable conclusion would be that these taxes are not very good policy, but local governments are as rapacious as any, and seek therefore to have Congress conscript retailers scattered across the country into acting as deputy tax collectors.

Traditional “brick and mortar” retailers say that current arrangements give Internet-based firms an unfair advantage. But the Marketplace Fairness Act would impose an unfair disadvantage on the most innovative sector of our economy: A Barnes and Noble store in Lincoln, Neb., would have only one sales tax to calculate, but an online bookseller would have thousands. Perhaps that would not be an unbearable burden for a giant such as Amazon, but smaller firms would suffer, as is usually the case with this sort of legislation. No surprise that the new tax regime is being pushed by location-based retailers, who clearly see an opportunity to gain a competitive edge over their online rivals.

The simplest solution, and the one most in keeping with our national principles, is to allow states and cities to collect sales taxes from online retailers whose main place of business is in their jurisdiction. An online retailer based in Austin, Texas, would collect the necessary taxes and send them in the same was as a brick-and-mortar retailer based in the same city, regardless of the origin of the customer. This would eliminate the problem of taxation without representation, and it would also provide an important incentive for tax competition among states and cities. If you want to have the next Amazon based in your town, you’ll want to keep your sales taxes relatively low. And local taxing authorities would still have the power to exempt Internet transactions, just as they exempt certain categories of consumer goods from taxation.

Contrary to the popular misconception, the 1998 Internet Tax Freedom Act does not create a special tax-free zone online. It merely bans “special and discriminatory” levies. It is bolstered by the Supreme Court’s 1992 Quill decision, which affirms that states may not impose taxes on retailers that have no physical presence within their borders. Senator Enzi’s ill-considered legislation would overturn this situation, and extend the taxing powers of local authorities from sea to shining sea. We would remind Senator Enzi that he belongs to the political party that embraces federalism. Worse, the law would open the door to interstate compacts by which transactions would be taxed in both the buyer’s and seller’s jurisdiction, a practice currently forbidden by the Internet Tax Freedom Act, which expires in 2014.

Intelligent tax reforms make life simpler for business. This would achieve the opposite. Prudent tax reforms increase the accountability of taxing authorities to taxpayers. This would achieve the opposite. Fair tax reforms ensure that businesses are to the extent possible treated equally. This bill moves in the opposite direction. And taxation without representation is anathema to all Americans — except, apparently, some of those serving in Congress (including Republicans who should know better), and those businesses that would benefit financially from violating this fundamental principle. It is a bad policy from both the economic and moral points of view. 

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