Online Tax Collection Mandate Won’t Produce Fairness

August 6, 2012

The Senate Committee on Commerce, Science and Transportation held a hearing on “Marketplace Fairness: Leveling the Playing Field for Small Business” this month.  Unfortunately, the substance of the hearing had very little to do with the laudable title, as it dealt with the Marketplace Fairness Act, which would shift the burden of tax collecting requirements to online retailers regardless of physical presence.  In contrast with other senators on the committee who seemed to accept the premise that it was somehow fair to impose a tax collection mandate on small online businesses over thousands of tax jurisdictions, Sen. Jim DeMint (R-SC) and Sen. Kelly Ayotte (R-NH) demonstrated their understanding both of the compliance burdens such a mandate would entail, and also of the value of different business models.

Proponents of the bill have presented the issue as one of fairness: that requiring online retailers to collect taxes would eliminate a price disadvantage for brick-and-mortar retailers.  That could perhaps be considered accurate if we were comparing two identical business models with the only difference between them being that one collected sales tax and the other didn’t.  However, the e-commerce business model of online retailers is distinct from that of brick-and-mortar retailers with differences going far beyond just tax collection.  At the hearing, Sen. DeMint stated that not all business models are the same and the federal government cannot make them the same.  In addition, the tax collection burden of administering for thousands of jurisdictions because an online purchaser could potentially be in any of them is not comparable to collecting only for the location of a physical store.  Not only is it overly simplistic to focus on sales tax collection as the only difference to be addressed, but the compliance burden is far heavier for online retailers.  This bill is a lopsided remedy based on an inaccurate diagnosis.

Republican proponents of the bill have been touting it as a “states’ rights” bill that would enable states to collect the sales taxes they are entitled to within their borders.  However, does a state have the right to draft online retailers who are outside their borders into service to collect for them?  At the hearing, Sen. Ayotte wondered why an online retailer in New Hampshire (which has no sales tax) would have to file tax returns in other states.  Do states with no sales tax have no rights?

In a Wall Street Journal op-ed, Sen. DeMint called proposals like this bill “taxation without representation,” and “antithetical to our federalist system, which promotes competition among our states for the best economic policies.”  Bill supporters protest that the consumers who owe the tax are residents of the state.  However, it is certainly a “tax collection mandate without representation” for remote sellers.

Sen. Michael Enzi (R-WY), the bill’s sponsor, called Internet sales a “tax loophole.”  The link between physical presence and taxes is not a loophole but a long-established principle that should not be swept aside to satisfy the states’ hunger for revenue.  We hope other senators join Sen. DeMint and Sen. Ayotte in contemplating the consequences of severing that link and considering what kind of “fairness” it would actually bring about.

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