The Senate Finance Committee held an April 25th hearing on “Tax Reform: What It Means for State and Local Tax and Fiscal Policy.”  Within the broader theme of the hearing, there was a lively exchange on the issue of online sales tax collection that illustrated supporters’ misperceptions regarding the compliance burden for small online retailers.
Sen. Ben Cardin (D-MD) devoted his time to questions in support of S. 1832(the Marketplace Fairness Act), which would require out-of-state retailers to collect sales and use taxes on purchases made to residents of their states — regardless of physical presence.  Sen. Cardin seemed to minimize the need for a small business exemption, stating that he was not aware of any such exemptions for collecting sales taxes.
In an exchange with Mr. Joseph Henchman of the Tax Foundation regarding how complicated the hundreds of different sales and use tax systems are, Sen. Cardin stated that he found it hard to believe that we can’t find a computer program to figure them out.  Mr. Henchman responded that the issue was not just the current complexity but also the need to keep up with changes in state and local tax laws.

It is not accurate to equate online sales tax collection with sales tax collection by brick & mortar stores.  While the physical store only needs to collect sales tax for its own tax jurisdiction, an online retailer is being asked to administer a tax collection regime for thousands of jurisdictions, as an online purchaser could potentially be in any one of them.  This huge compliance burden is the reason that a robust small business exemption is needed.

The point made by Mr. Henchman regarding the ever-changing nature of state and local tax laws is also an important one.  Not only are state and local tax jurisdictions a many-headed Hydra (thousands of heads in fact), even the number and nature of the heads is unstable.

While it is understandable for state governments to seek additional sources of revenue in these economic times, responsible policymaking requires weighing the long-term economic consequences of HOW that revenue is raised.  Targeting an innovative sector like electronic commerce because of its productivity is as short-sighted and unsustainable as a plague of locusts devouring a fertile field and moving on to the next.  Not only have they failed to achieve meaningful simplification of sales tax regimes, they are now seeking to dump the task of dealing with that failure on small online businesses and pocket the revenue.  We hope that Congress recognizes the need to promote new innovative business models like e-commerce rather than penalizing and taking advantage of their creativity.