The newest proposal to impose online sales taxes across state borders is the Remote Transactions Parity Act of 2015 (RTPA), which was introduced by U.S. Representative Jason Chaffetz (R-UT). The RTPA bears several similarities to the highly criticized Marketplace Fairness Act (MFA), and it would dramatically expand the taxing powers of states by allowing them to impose sales taxes on consumers residing in other states.
RTPA has attracted a wide array of critics, who argued in a letter to Congress the bill would override important tax precedents and harm consumers. Weakening the physical presence standard for sales taxes reduces states’ accountability to taxpayers and burdens consumers with added costs. Allowing one state to tax a resident of another state represents an expansion of state taxing powers, which logically end at the state’s borders. This expansion of powers would undermine tax competition by limiting the ability of taxpayers to move between states and their tax systems.
Proponents of this measure and others like it say they are needed to restore a balance between online and brick-and-mortar retailers. In reality, RTPA would give brick-and-mortar retailers an unfair 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, whereas local retailers only need to know their local tax rates. The RTPA legislation attempts to solve this problem by implementing “certified software providers” as the middle man in these complicated transactions, but these state-paid entities are unlikely to smooth the process between tax agencies and sellers and will create new administrative costs.
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.
Additionally, RTPA is unfair to online retailers because local retailers benefit from government 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.
The RTPA not only keeps MFA’s too-small “small-seller exception” at only $1 million, it also determines this exception based on all of a company’s annual receipts, not just the portion associated with remote sales. In addition, RTPA would impose the new requirements on all sellers on electronic marketplaces, such as eBay and Amazon, placing a new tax burden on far more businesses than previous bills would have done.
RTPA includes language protecting businesses below a $5 million sales threshold, but it leaves an opening for a state to audit any online seller if it suspects the business of committing “intentional misrepresentation.” This vague language leaves the door open for states to conduct audits based on arbitrary considerations.
Instead of forcing out-of-state businesses to serve as government tax collectors, Congress and state legislators should improve the existing sales tax system, which is 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 provide additional information about Internet sales taxes.
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 Institute Policy Tip Sheet, John Nothdurft examines several myths and facts about Internet taxes.
Research & Commentary: Amazon Taxes
Writing for the Heartland Institute Research & Commentary series, Elizabeth Henderson reports on the efforts of many state legislatures to enact legislation forcing 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 instead punish online retailers and stunt economic growth.
Research & Commentary: Internet Sales Taxes
This Heartland Institute Research & Commentary on Internet sales taxes 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
Veronique de Rugy and Adam Thierer discuss the Main Street Fairness Act in this study from the Mercatus Center. The new legislation would force retailers to collect sales taxes for states joining 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
Writing for the American Legislative Exchange Council, Andrew Moylan discusses the origin-based sourcing rule for Internet sales taxes and explains how 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.”
Congress Should Not Authorize States to Expand Collection of Taxes on Internet and Mail Order Sales
In this Heritage Foundation Backgrounder, David S. Addington considers congressional efforts to override the U.S. Supreme Court’s Quill decision through the Marketplace Fairness Act. Addington argues enactment of MFA 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 considers an overlooked issue in the Internet sales tax debate: the often-unenforced use tax. Currently, if a product is purchased from a “remote” seller with 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.
Marketplace Fairness: Leveling the Playing Field for Small Business
In written testimony before the U.S. Senate Commerce, Science, and Transportation Committee, Kelly Cobb of Americans for Tax Reform discusses remote-state sales tax collection and physical presence in light of the proposed Marketplace Fairness Act. “The effects on taxpayers of the Marketplace Fairness Act and similar legislation would be dramatic,” Cobb said. “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.”
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 subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.