Online sales tax collection is about states’ rights

September 27, 2012

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.


Sen. Boozman (R-AR) voices support for the Main Street Fairness Act

August 16, 2011
Senator Boozman (R-AR)

Talk Politics Segment: Senator Boozman supports online sales tax collection

Senator John Boozman (R-AR) gave an interview with Roby Brock on Talk Politics on Monday and said that he believed online retailers should collect sales tax, just as bricks-and-mortar retailers do. For Senator Boozman, it seems to be an issue of fairness and states’ rights:

[Where I live] sales tax is about 9 percent . . . and so when [bricks-and-mortar retailers] start out 9 percent behind [because they have to collect sales tax and online retailers don’t], then you’ve got problems. . . .

When you look at the trajectory, online sales are heading just upwards as quickly as they can do. If you’d asked me this question ten years ago I’d [have said] no, leave the internet alone, let them establish themselves. Right now they’re very much established, and so I don’t think it’s fair. . . .

I think it’s a states’ rights issue. I think the states ought to be able to allow [online sales tax collection], and I think . . . we need to make it such that the states can . . . enforce it, and then go from there. But I do think right now it’s not a level playing field, and you look at rural America, it’s very very difficult right now with the economy that we’ve got, but when you have this tremendous inequity it makes it that much harder.

We couldn’t agree more. States should be able to determine for themselves whether and how sales tax should be collected on online purchases, just like any other kind of purchase, and online and bricks-and-mortar retailers should all play by the same rules.

However, we are puzzled but encouraged by one statement Senator Boozman made: that he didn’t really like the Durbin bill (the Main Street Fairness Act) but would be working with Senator Durbin. We hope this signals a renewed sense of compromise to achieve a common good.

You can see the interview for yourself here; the comments on online sales tax collection begin at 19:12 and last just under two minutes. A summary of the interview is available here.

Bravo, Senator Boozman! Thank you for having the courage to speak out on this important issue and for committing to help protect states rights and local businesses.