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.)