Innovation Policy Post

The hearing discussed the three bills before Congress that would allow states to require out-of-state retailers to collect sales and use taxes on purchases made to residents of their states regardless of physical presence.  Witnesses supporting the bills (Michigan Retailers Association, Texas state legislator, Streamlined Sales Tax Governing Board) all stressed that the bills would “level the playing field” by eliminating the price advantage online retailers have in not collecting sales tax from the customer.  Amazon.com’s Paul Misener also expressed support for all three bills as protecting states’ rights and leveling the playing field, and also advocated keeping the small business exemption as low as possible.  

Overstock.com CEO Paul Byrne expressed opposition to the bills as conscripting online retailers as tax collectors without meaningful simplification, allowing states to shirk their collection duties.  Byrne proposed an alternative bill that would (1) require states to bear the costs of collection software; (2) not hold retailers liable for software errors; (3) require taxing authorities to compensate retailers for tax collection.     

eBay’s Cohen characterized the framing of this issue as the Internet vs. stores as a “false paradigm.”  The 21^st century retail model is a “Brick & Click” model incorporating both physical facilities and online elements.  The actual competition is between giant billion-dollar Brick & Click retailers and small business Brick & Click retailers.  “Big and small retailers offer consumers different benefits and their models come with different costs.”  Therefore, “sameness is not fairness” and a meaningful small business exemption is needed.     

While many of the questions from the committee unfortunately seemed to accept at face value the premise that the bills would restore fairness, there were some welcome voices urging caution.  Rep. Zoe Lofgren (D-CA) and Rep. Jason Chaffetz (R-UT) focused on the importance of a small business exemption, and Rep. Ben Quayle (R-AZ) stated his concern that eliminating the nexus requirement could open the door for other types of state regulation on entities without physical presence.  Rep. Bob Goodlatte (R-VA) highlighted disagreements on such issues as the required level of simplification and who has authority to set standards such as exemption, and declared the need to develop more consensus.         

Those calling for the collection of online sales taxes always talk of “fairness” and “leveling the playing field.”  However, the assumption that having online retailers collect sales taxes would result in a fair balance is overly simple.  The compliance burden of managing a complex system of multiple tax jurisdictions is not comparable to collecting at a physical store for just that one jurisdiction.  If the burdens are different, it would only result in overcompensating into a new imbalance.

In addition, the difference between e-commerce and brick & mortar retail is not just about the collection of sales taxes. The issue is much more complex, with each having advantages and disadvantages which are weighed by customers to reach a purchasing decision. Not only is sameness not fairness, but exact sameness would be impossible to achieve short of abandoning the innovative e-commerce model altogether. If government should not be picking winners and losers, it makes no sense to have legislation that seeks to eliminate a perceived advantage of one model without taking into account other various advantages and disadvantages. This is hardly fairness.

Congress could introduce as many bills as there are synonyms for “Market” and “Fairness” to be found in the thesaurus, but that doesn’t make any of them actually fair. We need policies that recognize the value of innovation and new business models like e-commerce, rather than forcing them to conform to existing models in the name of “fairness.”