Online sales tax collection is about states’ rights

At a hearing on the Marketplace Fairness Act before the Senate Commerce Committee on August 1, Senator Lamar Alexander (R-TN) emphasized that for him, online sales tax collection is all about states’ rights.

It’s an argument that seems to have puzzled a lot of people—we’ve seen several articles mischaracterizing online sales tax as a federal sales tax, and there’s some concern that with the Marketplace Fairness Act, the federal government would be getting involved in state issues.

So why did Senator Alexander say that he supports the Marketplace Fairness Act because it’s an issue states’ rights?

First, some background.

If you live in a state with sales tax, your online purchases are already subject to sales tax. If the online store doesn’t collect sales tax when you make a purchase, by law you are responsible for calculating the tax due and adding it to your state income tax return.

But states can’t enforce this law—they can’t check up on every citizen to see how much they’ve bought online and whether they’ve paid the correct sales tax—and they can’t require online stores to collect sales tax like brick-and-mortar stores do.

This is the result of two Supreme Court decisions, Bellas Hess (1967) and Quill (1992). In these decisions, the Supreme Court said that states can require a seller to collect sales tax only if the seller has a physical presence in the state.

Since states can’t a) require an online seller to collect sales tax if the seller has no physical presence in the state, or b) make sure individuals are paying the sales tax they owe on online purchases, they are powerless to enforce their own sales tax laws.

However, Congress can pass a law giving them back that ability, as the Supreme Court noted in their Quill decision. The Marketplace Fairness Act is one such law. It would not demand that online sellers collect sales tax. What it would do is give states the authority to, if they so choose, require online sellers to collect sales tax. It would be up to the states to decide whether and how to tax online sales.

This is why Senator Alexander called the issue a matter of states’ rights. States are currently powerless to enforce their own sales tax laws; the Marketplace Fairness Act would restore that power to them.

One Response to Online sales tax collection is about states’ rights

  1. Ken Miller says:

    Reference the last sentence in the above post: Quite the contrary, states with sales tax laws enforce them quite well. They just audit the books of the store. If there are sales taxes due, the state gets it’s money. Whether it’s on-line or not, it’s a simple matter of enforcement. What is, of course, really involved here, is that states want other state residents to bail them out for their previous profligate spending. They take their money from Joe’s left pocket, and when Joe spends money from his right pocket, they want their cut of that also, even tho they’re not entitled, thank to the brillant decision in QUILL.
    Perhaps, also, what Senator Alexander was thinking, but left unsaid, is a reaction to some Illinois politicians statements that they expect that Mr. Obama will bail them out of their financial mess. By the feds getting involved in states rights regarding the sales tax, that gets the nose of the federal camel under the states’ tents.

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