As I’ve pointed out, many states have taken steps in the past few years to chip away at the problem of uncollected sales taxes on Internet purchases, which cost states billions of dollars each year. In an essay in today’s Wall Street Journal, I explain why and how Congress can solve this problem once and for all.
Sales taxes are always legally due on an item purchased from an Internet (or catalog) merchant if the same item would be taxable if bought in a local store. But the Supreme Court has held that states can’t compel the seller to collect the tax from a customer unless it has a physical presence — store, warehouse, or sales force — in the customer’s state.
States have been pursuing a three-track strategy to address this issue.
These state initiatives are finally spurring action by Congress. Three bills now before Congress would empower states to collect the taxes due on Internet sales. Most recently, on November 9 Senator Mike Enzi (R-WY) and four other Republican and five Democratic co-sponsors introduced the Marketplace Fairness Act.
The bill empowers states that have implemented the SSUTA or its major provisions to require merchants with more than $500,000 in nationwide remote sales annually to collect and remit their sales taxes. (The sponsors have said they would raise that threshold if necessary to gather additional support in Congress.) The bill also requires the states to provide to Internet retailers, at no cost, software or online services that correctly calculate the sales due in all of the cities and counties that levy these taxes at the actual tax rates in effect.
My Wall Street Journal piece makes the case for speedy congressional enactment of legislation along these lines. In brief:
Now that at least one Internet sales tax bill has received strong bipartisan support, there’s reason to hope that Congress will soon address this problem in a way that fairly balances the interests of state and local governments, Main Street businesses, and large and small Internet retailers.
In the meantime, states need to keep up the pressure by pursuing their own measures to collect the taxes they are owed and level the playing field between their local merchants and tax-advantaged remote sellers.