Policy Documents

Research & Commentary: Internet Sales Taxes

November 19, 2012

In the past few years members of Congress have proposed several bills to expand states’ ability to tax purchases made online and from mail-order catalogs. The Main Street Fairness Act, Marketplace Equity Act, and Marketplace Fairness Act all would expand states’ ability to charge sales taxes on out-of-state retailers regardless of whether the retailer has a physical presence in the state. These proposals would allow states to impose scores of new taxes on consumers and open the door to other new taxes. 

The U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota held a state must prove a company has “substantial nexus” within a state before taxes can be imposed. Since this ruling the nexus or “physical presence” standard has been an important taxpayer protection. 

Supporters of online taxes argue these taxes are needed to restore a balance between online and bricks-and-mortar retailers. But the imposition of sales taxes on Internet sales would slow the growth of the e-commerce industry, one of the few sectors of the economy that has seen growth in recent years. In addition, requiring online retailers to charge a sales tax in states where they do not have a physical presence would force consumers to pay a tax to a government with whom they have no political voice and from whom they receive no government benefits or services. 

Removing the physical presence standard for sales taxes reduces states’ accountability to taxpayers and enables a dramatic expansion of state taxing powers. “Once the online sale of real goods is taxed, it will be only a matter of time before digital products, such as iTunes, apps, ring-tones, digital books, and movies will also be taxed,” wrote The Heartland Institute’s government relations director, John Nothdurft, in a Heartland Policy Tip Sheet. “States will see the Internet as a practically unlimited source of tax income by charging low rates on large numbers of transactions.” 

Eliminating the physical presence standard would undermine tax competition and place an undue burden on consumers and businesses. 

The following documents are some of The Heartland Institute’s recent work on Internet sales taxes and additional articles examining Internet sales taxes and the proposed extension of state taxing powers.

Ten Principles of Telecom Policy
http://heartland.org/policy-documents/ten-principles-telecom-policy
In this Heartland Institute Legislative Principles booklet, Hance Haney and George Gilder examine the results of telecom reforms in Indiana, the advances made by other innovation leaders in the telecom market, and how other states can follow their lead to reap the rewards of new investment in telecommunications services. 

Policy Tip Sheet: Myth vs. Fact—Internet Taxes
http://heartland.org/policy-documents/policy-tip-sheet-myth-vs-fact-internet-taxes
In this Heartland Policy Tip Sheet, Heartland’s government relations director, John Nothdurft, examines several myths and facts about Internet taxes. 

Research & Commentary: Amazon Taxes
http://heartland.org/policy-documents/research-commentary-amazon-taxes
Elizabeth Henderson describes the efforts of many state legislatures to enact legislation that would force out-of-state online and catalog retailers to collect and remit sales taxes on purchases made by residents in the state. Henderson argues these so-called “Amazon taxes” do not “level the playing field,” as proponents argue, but punish online retailers and stunt economic growth. 

Research & Commentary: Internet Sales Taxes
http://heartland.org/policy-documents/research-commentary-internet-sales-taxes-0
The Heartland Institute explains how taxing the Internet hurts business and fails to bring in the revenues proponents hope for: “The new tax-remittance burden, however, would fall on online retailers. It would add to their costs and could demolish one of the last remaining redoubts of vibrant economic enterprise—the last thing any state needs during a deep recession.” 

The Internet, Sales Taxes, and Tax Competition
http://heartland.org/policy-documents/internet-sales-taxes-and-tax-competition
Veronique de Rugy and Adam Thierer discuss the Main Street Fairness Act in this study from the Mercatus Center. The legislation would force retailers to collect sales tax for states that join a formal tax compact. The authors examine alternatives to the tax, including an origin-based sales tax. 

An “Original” Solution to Taxation of Online Sales
http://heartland.org/policy-documents/original-solution-taxation-online-sales
In this article from the American Legislative Exchange Council, Andrew Moylan discusses the origin-based sourcing rule for Internet sales taxes and argues it solves many of the problems created by destination sourcing. “Perhaps the most important advantage of origin sourcing, however, would be the infusion of tax competition it could engender. Under such a system, businesses would have an incentive to invest in lower-tax jurisdictions so as to attract price-conscious customers,” he writes. 

Marketplace Fairness: Leveling the Playing Field for Small Business
http://heartland.org/policy-documents/marketplace-fairness-leveling-playing-field-small-business
In written testimony before the Senate Commerce, Science, and Transportation Committee, Kelly Cobb of Americans for Tax Reform discusses the issue of remote-state sales tax collection and physical presence in response to the proposed Marketplace Fairness Act. “The effects on taxpayers of the Marketplace Fairness Act and similar legislation would be dramatic,” Cobb states. “From a taxpayer perspective, any bill that touches remote sales taxes must preserve the physical presence standard and protect consumers on net from a higher tax burden. Unfortunately, the federal online sales tax bills miss the mark widely on both fronts.” 

Congress Should Not Authorize States to Expand Collection of Taxes on Internet and Mail Order Sales
http://heartland.org/policy-documents/congress-should-not-authorize-states-expand-collection-taxes-internet-and-mail-orde
David S. Addington of The Heritage Foundation considers efforts by Congress to override the Supreme Court’s Quill decision through the Marketplace Fairness Act. Addington argues the bill would encourage state governments to “take more money from taxpayers and spend it instead of getting the size, scope, and cost of state governments under control.” 

States Already Can Tax Out-of-State Purchases, but Rarely Enforce those Laws
http://www.aei.org/article/economics/fiscal-policy/taxes/states-already-can-tax-out-of-state-purchases-but-rarely-enforce-those-laws/
Michael S. Greve of the American Enterprise Institute notes an overlooked element of the Internet sales tax debate, the often-unenforced use tax. Currently, if a product is purchased from a “remote” seller that has no contact with a consumer’s state, the sale is not “tax-free”: the consumer owes a “use tax” equivalent to the local sales tax. Many states do not enforce this tax. 

The Marketplace Fairness Act Would Create a State Sales Tax Cartel and Hurt Consumers
http://heartland.org/policy-documents/marketplace-fairness-act-would-create-state-sales-tax-cartel-and-hurt-consumers
Jessica Melugin argues against the Marketplace Fairness Act and in favor of an origin-based tax approach. “If Congress is to consider Internet sales tax policy as part of broader tax reform efforts, an origin-based approach would address the legitimate need for sales tax reform and avoid the Marketplace Fairness Act’s harmful consequences,” she writes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Tech News Web site at http://news.heartland.org/tech, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.