Debate Club takes on online sales tax collection

August 10, 2012
U.S. News and World Report

U.S. News and World Report’s Debate Club tackles online sales tax collection.

U.S. News and World Report‘s Debate Club is taking on online sales tax collection. Here’s the line-up, along with our thoughts on each argument:

Daniel Mitchell, Senior Fellow, the Cato Institute: “States should not be allowed to create a privacy-threatening database of our purchases in order to impose taxes outside their borders.”

We say: Agreed! Thank goodness the Marketplace Fairness Act doesn’t allow any of that to happen.

Sandy Kennedy, President of the Retail Industry Leaders Association: “Tax loophole gives online retailers an unfair loophole over their brick and mortar competitors.”

We say: Agreed. In fact, we don’t think anyone is contesting this point.

Jim DeMint, Republican Senator from South Carolina: “A nationally mandated Internet tax is anything but fair.”

We say: Yep. Fortunately, the Marketplace Fairness Act wouldn’t create a national tax or “tax the Internet” at all. It would let states, if they so choose, require online merchants to collect sales tax on purchases that are already subject to sales tax—purchases made by that state’s residents, who have to pay sales tax on online purchases anyway. Sales tax is paid by residents of the state where the tax is remitted, which means the residents who pay it both benefit from the services that sales tax funds and have the opportunity to vote on the sales tax rate. That’s taxation with representation. And the federal government is not involved in sales tax at all. The U.S. doesn’t have a national sales tax, and the Marketplace Fairness Act wouldn’t create one.

Michael Mazerov, Senior Fellow at the Center on Budget and Policy Priorities: “Internet businesses should live by the same rules as “mom and pop” stores on Main Street.”

We say: That seems fair, as long as allowances are made for the fact that internet businesses may sell to all 50 states and therefore may have more administrative requirements than local stores when it comes to sales tax. States should simplify their sales tax codes to make it easy for internet businesses to collect sales tax. And in fact, the Marketplace Fairness Act requires states to simplify their sales taxes before they can require online sellers to collect.

Steve DelBianco, Executive Director of NetChoice: “States already collect most online sales tax.”

We say: This quote doesn’t really summarize DelBianco’s main argument. We’d have picked this one: “…who’s pushing this idea? Those giant brick-and-click retailers who’d like to raise costs for their rivals.” And actually, we’ve been observing the exact opposite. Small mom-and-pop stores are supporting online sales tax collection wholeheartedly. We recently tweeted about a letter the National Association of Music Merchants sent to Congress; it was signed by 88 state and local trade associations that exist to represent the interests of small business owners. Or look at this op-ed from the St. Louis Post-Dispatch by Dave Overfelt, president of the Missouri Retailers Association, which offers a cogent summary of exactly why local small business owners so strongly support the Marketplace Fairness Act.

This isn’t David vs. Goliath. One group of small business owners wants to preserve an advantage it has over another group of small business owners. DelBianco would have you believe that big retailers like Best Buy and Walmart are trying to crush small online retailers, but the truth is, Best Buy and Walmart really aren’t threatened by small online shops. This is about whether small online shops deserve special treatment that small local shops don’t receive. There are reasonable arguments on both sides of the issue, but the one that says big companies are trying to crush small companies isn’t one of them.

Adam Thierer, Senior Research Fellow for the Mercatus Center at George Mason University: “There are better ways to tax Internet companies while encouraging interstate economic competition.”

We say: Interesting, but irrelevant: Online sales tax collection does not mean taxing Internet companies. They’d be collecting sales tax, not paying it.

But if you read Thierer’s entire piece, it turns out that he’s more concerned a) about the possibility of taxation without representation, b) that collecting sales tax would be too difficult for online sellers, and c) that it would be easier for states to raise sales taxes. He proposes that origin-based sales tax is the best solution.

Let’s take these one by one.

a) Online sales tax collection does not change who pays sales tax to which state. If you live in California, you will only pay California sales tax. If you live in Kansas, you will only pay Kansas sales tax. And so on. You have the chance to vote on sales tax rates in your own state, and you benefit from the services that your sales tax pays for—whether you pay that sales tax at a local shop or an online shop. This is taxation with representation. No state has or will have the ability to collect sales tax from a resident of another state—unless, that is, Thierer’s proposal for origin-based sales tax succeeds. We explain more on that below.

b) The Marketplace Fairness Act says that before a state can require online sellers to collect sales tax, it has to simplify its sales tax laws to make it easy for the seller to do so. And even if you think they’re still not simple enough (are taxes ever simple enough, really?) there are services that will manage all your sales tax needs. Sales tax management services are available for every price point, including “free.” (We happen to like our service, TaxCloud, which is completely free for retailers—but several others are also available.) Just make sure you choose one that has been tested and certified by states, so you’ll be protected in the event of an error.

c) Not sure where the idea that states would have an easier time raising sales taxes comes from. The Marketplace Fairness Act wouldn’t change anything about the way that states determine or change sales tax rates. Those decisions are made by voters and the people they elect to their state legislatures.

Now, on origin-based sales tax. It’s ironic that Thierer says he’s concerned about taxation without representation and then supports origin-based sales tax. It’s the essence of taxation without representation. What “origin-based” really means is “seller-based.” Under this proposal, if you are in Oregon, say, and buy from an online shop located in Vermont, you’d have to pay Vermont sales tax. The sales tax you pay goes to another state, to support the residents of that state. You have no say in what that sales tax rate is or how it is used, and you don’t benefit from the services it funds.

Residents of Oregon, New Hampshire, Montana, Maryland, and Alaska: This means that even though your state doesn’t have sales tax, if you buy online from a store located in another state, you would have to pay sales tax to that state. You won’t benefit from that sales tax, and you won’t have a say in whether it should be raised or not or what services it should fund, but you’ll have to pay it all the same.

It’s hard to believe that anyone really thinks that origin-based sales tax is a good idea. The reason it has the support it does is that it’s easier on sellers—but at the expense of taxpayers. We can’t emphasize this enough: Origin-based sales tax is a really, really bad idea. It’s taxation without representation.

Andrew Moylan, Vice President of Government Affairs for the National Taxpayers Union: “Online sales tax could open a Pandora’s box of overzealous collection efforts.”

We say: This quote isn’t specific, but if you read the full piece, it turns out Moylan is worried that online sales tax collection will open the door for states to tax people outside its borders. Let’s be clear: Proponents of online sales tax collection are suggesting only that states be allowed to collect sales tax from their own residents. No one is suggesting that states be allowed to impose tax on residents of other states, and the Marketplace Fairness Act does not challenge this sensible border.

Neil Niman, Associate Professor of Economics at the University of New Hampshire: “Internet sales tax can do a great deal more economic harm than good.”

We say: A fair concern, though not one we share. If you read Niman’s entire piece, you’ll see that he argues that online sales tax collection would make it “more expensive for out-of-state businesses to gain access to [in-state] citizens.” Actually, it would just make sure that out-of-state sellers have to include the same tax that in-state sellers do. In other words, it would ensure that in-state and out-of-state sellers are playing by the same rules, instead of favoring out-of-state sellers, as the current system does.

It is also worth noting that other economists have reached the opposite conclusion about the effects of online sales tax collection on the economy. As we recently posted, a nonpartisan market research firm has issued a report saying that online sales tax collection may actually help the economy, particularly jobs.

Michael Kercheval, President of the International Council of Shopping Centers: “Online-only retailers are exempt from collecting sales tax at every point of purchase.”

We say: We’re going to blame U.S. News for choosing a quote that doesn’t really summarize the argument. If you read Kercheval’s entire piece, you’ll see that he is primarily concerned with the disadvantage to Main Street retailers, who, he points out, are invested in providing jobs and building local communities in a way that online retailers simply aren’t. It’s a fair point. Right now, for better or worse, our communities are funded by sales tax revenue. We rely on it for fire and police departments, parks, schools, and services for children and the elderly. But if people shop online and online shops don’t collect sales tax, revenue declines and so does funding for these services. What’s more, local shops provide jobs for people in the community—and at a much higher rate than online retailers.

So why continue with a system that favors online retailers at the expense of our communities? Bring it up to date, level the playing field, and let the free market work instead. Local retailers and online retailers should play by the same rules.

Of course, these summaries don’t do justice to the full range of arguments on both sides of the issue, so we suggest you read each piece in full.

But keep in mind the facts about the Marketplace Fairness Act and online sales tax collection:

  • It’s not a new tax.
  • It’s not a tax on the internet.
  • It doesn’t impose a national sales tax. It just gives states the right to enforce their own sales tax laws, if they so choose.
  • It doesn’t require retailers to track or report consumers’ purchases.
  • It doesn’t allow states to impose taxes outside their borders.
  • It doesn’t impose any taxes on online retailers. (States could require them to collect sales tax, not pay it.)

Online sales tax collection debated in Wall Street Journal

November 15, 2011
Wall Street Journal

Wall Street Journal: Should states require online retailers to collect sales tax?

The Wall Street Journal has published a debate on online sales tax collection. Taking the pro side is Michael Mazerov, Senior Fellow at the Center on Budget and Policy Priorities in Washington, DC. Taking the con side is Steve DelBianco, Executive Director of NetChoice, a “coalition of e-commerce and online businesses.”

Both sides are clearly and cogently presented, and we highly recommend the article. Of course, as our regular readers know, we’ve long been advocates of the “pro” side. Mazerov does a terrific job of explaining why online sales tax collection is necessary and countering the most common objections to online sales tax collection, while DelBianco’s argument boils down to “it’s too difficult for small businesses.”

But we’ve worked hard to make sure that that’s not true. TaxCloud is designed specifically to remove the cost and complexity of online sales tax collection: It not only provides real-time sales tax calculation, it also handle exemptions and audits—plus, it’s easy to use and completely free.

A quick correction: At the head of the article, the description of the current sales tax situation says that state and local governments are pushing Congress to “require all online retailers to charge sales taxes in all states.” (emphasis added) “Charge” here should be “collect”—as we’ve said many, many times, sales tax is already due on online purchases. The question isn’t whether online retailers should charge (let alone, as some have suggested, pay) sales tax; no matter what, consumers owe sales tax on their online purchases. The question is whether online retailers should be required to collect sales tax. And the answer . . . is “yes.”

CNBC’s Maria Bartiromo covers the “Internet Sales Tax Showdown”

June 21, 2011
CNBC: Internet Sales Tax Showdown

CNBC: Internet Sales Tax Showdown - MONDAY, 20 JUNE 2011 @ 04:15 PM ET

Maria Bartiromo sits down with Curtis Dubay and Michael Mazerov

Maria Bartiromo sits down with Curtis Dubay of the Heritage Foundation, and Michael Mazerov from the Center on Budget & Policy Priorities, to discuss whether imposing an online sales tax is the right move to make for states that are in need of revenue.

Yesterday, immediately following the closing bell in New York, CNBC’s Maria Bartiromo interviewed Curtis Dubay of the Heritage Foundation and Michael Mazerov from the Center on Budget and Policy Priorities on whether collecting sales tax online is the right move for states that are in need of revenue.

Ms. Bartiromo initiated the questioning:

Collectively, states are facing a fiscal budget shortfall of $130B according to the Center on Budget and Policy Priorities, and requiring online-only retailers to tax their sales, particularly in states where they don’t have a legal presence, could generate a much needed $10B according to a study by the University of Tennessee. Not everybody believes is the right solution to solving the states fiscal problems. The Heritage Foundation Senior Policy Analyst Curtis Dubay says “such attacks won’t raise any revenue.” Michael Mazerov a Senior Fellow from the Center on Budget & Policy Priorities says “states need the revenue, and should collect it to plug the holes.”

Mr. Dubay then started off:

Rather than nickel and dimeing their already over-taxed citizens with more taxes, states should be focused on cutting their spending. . . No amount of tax increases can bail them out of their profligacy.

As our regular readers already know, nobody in this debate is suggesting any new taxes, or any tax increases! We hate it when people suggest such nonsense. Fortunately, Mr. Mazerov is no stranger to this subject, and he quickly set the record straight:

Well this isn’t a tax increase. Everything you buy on the internet is subject to tax, and has already been subject to tax. All we’re really talking about here is changing the law so that companies like Amazon and Overstock have to collect the same tax that every store on Main Street has to collect. . . Internet sales are already subject to tax in every state [that collects sales tax]. If the seller doesn’t collect it from you, you have to pay it yourself directly to your state. It’s not a new tax. It’s not a tax increase.

Well put, Mr. Mazerov! On the estimates that states could collect between $10B and $23B and how states may consider this revenue significant in light of the many budget cuts they have already made or are planning to make, Mr. Mazerov continued:

States have been making huge cuts, and $10B isn’t going to offset a very large share of what they’ve been forced to [cut] already. But it is a significant amount of revenue, and it could be the difference for whether kids have a summer school program in a certain state, or whether tuition goes up at the community college by only 5% rather than 10%. So it’s definitely worth doing. Nobody says this is going to solve the fiscal problems of the states, but it can help.

Smartly, Mr. Dubay agreed, but then he quickly went on to try and argue once again that this is a new tax:

Well he’s right, residents are required to file use taxes, but the fact remains this would be, uh, kind-of a new tax.

No, Mr. Dubay. Mr. Mazerov is correct and you are not. This is not “kind-of a new tax.”

Mr. Dubay went on to describe how states that have been enacting the affiliate nexus laws have been seeing companies like Amazon and Overstock terminate their affiliate relationships in those states, with the result that the state not only doesn’t gain any meaningful revenue, it actually loses revenue when the jobs created by those relationships go away. In response, Mr. Mazerov quickly pointed out that:

. . . the states basically have to stick together to solve this problem. The best solution is not at the state level. The best solution is at the federal level.

We strongly suggest you go and check out the the video yourself—and we look forward to introduction of the Main Street Fairness Act (very soon!), which will finally address this problem at the federal level, as Mr. Mazerov and many, many others have suggested.

Massachusetts considers affiliate nexus bills

May 31, 2011

Massachusetts is considering two bills, one from the House and one from the Senate, that would require online retailers with Massachusetts affiliates to collect sales tax.

According to this article in the Cape Cod Times, a University of Tennessee study puts Massachusetts’ annual sales tax losses at $11.4 billion by 2012. The same article states that the senator sponsoring the bill, Senator Steven A. Tolman, hopes to recover that money in order to fund services that have been cut due to the recession:

Tolman said the tax money is needed to invest in state programs that had to be cut in the recession.

“In these times of tight state budgets and the reduction or elimination of many state-funded programs, Massachusetts can no longer afford to subsidize Internet and catalogue retailers by not collecting sales tax on purchases made by residents of Massachusetts,” Tolman wrote in an email.

Tolman said what essentially are tax-free sales gives online vendors an unfair advantage over bricks-and-mortar stores.

“The current law penalizes Massachusetts’ main street retailers and gives those without a physical presence in Massachusetts a 6.25 percent head start,” he said.

Michael Mazerov, an official from the Center on Budget and Policy Priorities, also commented on states’ need for sales tax revenue:

“State and local governments are losing billions of dollars a year in revenue that they need to provide education, health care, police protection and a whole other range of services,” he said.

Mazerov said the government is already entitled to this tax money; its absence has added to state budget woes.

“Particularly now, with the downturn of a depressed economy, local governments are losing lots of revenue that they’re legally entitled to receive,” he said. “These are not new taxes. We are talking about collecting sales tax on things that are taxable if you buy it in the store.”

Both Tolman and Mazerov make good points, and we agree that online retailers should collect sales tax, just as local retailers do. However, we don’t believe that bills like these, which target online retailers that use affiliate marketers, are the best solution.

When other states have passed these kinds of affiliate nexus laws, online retailers have responded by simply ending their affiliate relationships in the state. These laws end up hurting small businesses in the state that rely on affiliate marketing income and do not bring in any additional sales tax revenue.

A better solution is the Streamlined Sales and Use Tax Agreement (SSUTA) and the federal Main Street Fairness Act. States that join SSUTA implement its sales tax guidelines to make collecting sales tax for more than one state easy for retailers. The Main Street Fairness Act would, in turn, allow SSUTA member states to require online retailers to collect sales tax.

It makes sense: Only those states that have made it easy for online retailers to collect sales tax would be allowed to require online retailers to do so, and retailers with affiliates wouldn’t be singled out.

Everyone would play by the same rules. And isn’t that the best solution for everyone?

Response: New York Times rails Amazon (but no one else)

December 28, 2009

On the heels of several other articles by other major papers, Randall Stoss wrote a seething article in the New York Times about how Amazon should be required to collect sales tax (quite noticeably the article didn’t point out or suggest that any other Internet retailers should).

This is yet another article about how should be collecting sales tax, even when most other retailers are not.  Another curious aspect of this particular article:  Why does it bother the Old Gray Lady in New York, since is already collecting and remitting sales tax from consumers in New York (though they are understandably not pleased about it).

In our view, the media is putting alot of effort behind a recent report (“Amazon’s Arguments Against Collecting Sales Taxes Do Not Withstand Scrutiny“) published November 16, 2009 by Mr. Michael Mazerov of the “Center on Budget and Policy Priorities.”  Mr. Mazerov is not new to the issues of Internet sales tax matters, having articulated many aspects of the debate more than ten years ago:

In 1998, Mr. Mazerov co-authored a detailed report “A Federal Moratorium on Internet Commerce Taxes Would Erode State and Local Revenues and Shift Burdens to Lower-Income Households.”  Sadly, the conclusions drawn in 1998 ultimately came to pass primarily, although not specifically related to what became known as the “Internet Tax Freedom Act” – which thankfully limited it’s so-called “moratorium” to only “Internet access” and “online services” specific taxation (this legislation was recently extended through 2014).  Particularly prescient was their conclusion at the time:

“The avoidance by affluent consumers and businesses of sales taxes on Internet purchases could mean higher sales taxes or reduced public services for low- and moderate-income households”

In 1999 Mr. Mazerov authored a summary report entitled “Should the Internet Remain a Sales Tax Haven?” (also for the CBPP).  Also a worth-while read on the subject.

Finally, and perhaps most insightfully, in February 2000, Mr. Mazerov testified alongside Iris J. Lav (CBPP Deputy Director) before the US Senate Committee on the Budget:

“When a seller does not collect and send the tax to the state of the purchaser, customers who receive the goods are supposed to pay state and local sales taxes directly. Consumers are supposed to file a tax return showing the value of the untaxed goods they have purchased from remote sellers and to pay the tax on those purchases. More than one-third of the states actually provide information and forms in their personal income tax booklets to help consumers pay sales taxes on purchases from out-of-state companies. Nonetheless, compliance with this self-remittance requirement is minuscule in the case of individual consumers and spotty in the case of businesses — especially small businesses.

The combination of weak tax compliance by consumers and the limited obligation of remote sellers to collect taxes is eroding the sales tax base of state and local governments. As I will discuss shortly, it is disproportionately upper-income households who are avoiding paying their fair share of sales taxes by purchasing from remote sellers. Both the revenue loss and the unfair tax advantages for the affluent are likely to increase because of the still more rapid growth in Internet purchasing that is projected to occur in the next few years.”

Their testimony concluded:

“If initial steps are not taken soon to end the de facto sales tax exemption that applies to most Internet and mail-order purchases, the sales tax burden on lower-income Americans is likely to rise and the access of all citizens to high-quality education and other critical state and local services could be impaired. These outcomes will be all the more severe should Congress enact a blanket sales tax exemption for Internet purchases or even tighter restrictions on the ability of states to require remote sellers to collect and remit sales taxes than currently exist. There is a practical alternative to both of these options. Congressional endorsement of the principle of equal tax treatment of retail store purchases, mail-order purchases, and Internet purchases could encourage the electronic commerce and mail order industries to work constructively with state and local governments toward a workable compromise. Such a compromise could achieve a reduction in sales tax compliance costs for many businesses, while ensuring both that no business or individual avoids paying a fair share of sales tax and that state and local governments remain capable of financing necessary services” 

It seems without question that the CBPP has been familiar with the issues at hand for quite some time – and that Mr. Mazerov is more than sophisticated on these matters, and we eagerly look forward his updated report on the matter, which we predict will be titled: “The first decade of Internet Sales Tax (or lack thereof).”