Since Senator Jim DeMint’s July 31 op-ed in the Wall Street Journal asserted that online sales tax collection is taxation without representation, we’ve been seeing this argument repeated all over the media. Even thoughtful articles that are trying to look at the topic objectively seem to be taken in by this red herring.
So what’s the truth about online sales tax and taxation without representation?
The three bills currently before Congress that call for online sales tax collection, including the Marketplace Fairness Act, require that that sales tax is destination-based. That means that the sales tax is applied based on where the consumer, not the store, is located. Why? Because consumers are the ones paying the tax, so they should a) get to vote on what the sales tax rate is and b) benefit from the services funded by sales tax.
In other words, if you live in Vermont and make a purchase from an online store located in California, you would pay Vermont sales tax. The store in California would collect the sales tax just as a local store would and remit it back to Vermont, where it would help to pay for police and fire departments, public roads, schools, libraries, and more. And as a resident of Vermont (or any state with sales tax), you have the opportunity to vote on the local sales tax rate and elect the state and local representatives who help administrate sales tax. Which means that destination-based sales tax is taxation with representation, despite what Senator DeMint said.
What’s the other option? Origin-based sales tax. This means that no matter where the customer is located, the sales tax is applied based on where the online store is located. If you live in Vermont and make a purchase from an online store based in California, you’d pay California sales tax that is remitted to California. Where, as a Vermont resident, you have no say in the sales tax rate, cannot vote for state and local representatives, and do not benefit from the services that sales tax helps fund.
In other words, it’s taxation without representation. It’s also, for our money, simply wrong—when you pay sales tax, you should benefit from the roads, schools, parks, and more that it funds.
What a good thing that none of the bills before Congress suggest that origin-based sales tax is the way to go.
So who is supporting origin-based sales tax (taxation without representation)? Ironically, it’s Senator Jim DeMint, along with Adam Thierer, a senior research fellow at the Mercatus Center at George Mason University, and others. Both Senator DeMint and Mr. Thierer have written editorials attacking destination-based sales tax as taxation without representation and proposing that origin-based sales tax is best.
But the facts just don’t hold up.
We’re not saying that there’s no reason to support origin-based sales tax. There is: It’s easier for online shops to apply just one sales tax rate, based on their own location, instead of applying various rates based on their customers’ locations. They also would get to remit all the sales tax on purchases made at their store to their own state, rather than sending it back to the state where the customer, who paid the tax, resides.
But let’s not kid ourselves. Origin-based sales tax is taxation without representation.
Destination-based sales tax—the kind proposed in the Marketplace Fairness Act—is not.