In the past few years members of Congress have proposed several bills to expand states’ ability to force out-of-state retailers to collect sales taxes for online and mail-order sales even if the seller has no physical presence in the state. The latest proposal before Congress is the Marketplace Fairness Act, proposed by Sens. Dick Durbin (D-IL), Mike Enzi (R-WY), and Lamar Alexander (R-TN).
Under the proposed law, states would be given vast new power over retailers outside their borders, including the imposition of auditing requirements on out-of-state online sellers. States would be allowed to create their own unique definitions of how and when items are taxed, increasing confusion for out-of-state sellers.
Proponents of this measure and others like it say they are needed to restore a balance between online and bricks-and-mortar retailers. In reality, the Marketplace Fairness Act would give bricks-and-mortar retailers a distinct advantage. Even with today’s technology, it is difficult and expensive for online merchants to accurately charge sales taxes for the products they sell to the 9,600 different taxing bodies in this country. In addition, local retailers benefit from services such as roads; police, fire, accident, and disaster protection; and utilities delivered over money-saving public rights of way. Out-of-state retailers get none of these.
Removing the physical presence standard for sales taxes also reduces states’ accountability to taxpayers and constitutes a dramatic expansion of state taxing powers. Consumers, who ultimately bear the burden of added costs, are the real losers in this scenario.
Instead of forcing out-of-state businesses to serve as government tax collectors, Congress and state legislators should implement a sales tax system based on where the product was sold, known as an origin-based tax system. This would truly level the playing field, with both online and bricks-and-mortar retailers paying the same tax.
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.
Lawmakers to Renew Push for Online Sales Tax
Brendan Sasso of The Hill discusses the efforts by a bipartisan group of senators to renew a push for online sales tax legislation, the Marketplace Fairness Act.
Conservatives Should Run, Not Walk, Away from So-Called ‘Marketplace Fairness Act’
Andrew Moylan of the R Street Institute argues the Marketplace Fairness Act “ends up giving a federal blessing to a massive expansion in state tax collection authority, the dismantling of a vital taxpayer protection upon which virtually all tax systems are based (the notion that physical presence is the appropriate limit for state tax authority), all while harming a sector (online sales) that still only accounts for roughly $0.07 of every $1 in retail spending.”
Ten Principles of 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
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
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
The Heartland Institute explains how taxing the Internet hurts businesses 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
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
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
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
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
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
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 [email protected].