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Helping States Level the Sales Tax Playing Field

November 15, 2011 at 5:08 PM

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.

  • They have tried to encourage consumers to pay the sales taxes they owe, such as by putting a payment line on the state income tax form.
  • They have enacted and tried to enforce laws that make clear that if a company has a sales representative or subsidiary in a state, this constitutes a physical presence in that state, obligating the company to charge sales tax.
  • They have worked together, by agreeing to the Streamlined Sales and Use Tax Agreement, (SSUTA), to harmonize and simplify their sales tax rules in hopes that Congress would enact a law allowing them to require at least large and mid-sized Internet and catalog retailers to charge sales tax, regardless of physical presence.  (The Supreme Court made clear that Congress could do this.)

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:

  • The uncollected sales taxes are due under current law, and states and localities could really use the extra $10 billion to $20 billion (from Internet and catalog sales combined) to forestall additional cuts in critical services like education, health care, and public safety.
  • The fact that local retailers collect sales taxes but Internet merchants generally don’t puts the former at an unfair 5-10 percent price disadvantage, eliminating local jobs and harming local economies.
  • Poorer people are much less able to avoid sales taxes by shopping online than better-off people are, since they often don’t own computers, subscribe to broadband, or qualify for credit cards.  This disparity shifts the burden of the sales tax — which already takes a larger share of the incomes of poorer people than wealthier ones — even more onto poor consumers.

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.

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