Shop online? Internet retailers have a tax advantage Congress must end

In recent years, internet sales have grown by nearly 15 percent per year, compared to 4 percent per year for brick-and-mortar retail sales. Although e-commerce represents less than 9 percent of total retail sales, this shift in where we shop is eroding states’ sales tax base. Under the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, sellers without a physical presence in a state cannot be required to collect and remit that state’s sales tax. As a result, online sellers have an artificial competitive advantage over local brick-and-mortar sellers, who must collect sales tax from their customers. Congress needs to end this unfair tax advantage.

The good news is that the Quill decision left room for Congress to intervene and a number of lawmakers in both parties are looking to make a change. Both the Senate’s Marketplace Fairness Act and the House’s Remote Transactions Parity Act authorize states to require tax collection by online and other out-of-state sellers. Before exercising this authority, states would have to simplify their sales tax system and provide out-of-state sellers with free tax software and a centralized filing and audit process. These bills would take a big step toward leveling the playing field.

Contrary to some conservative critics’ claims, these bills would not undermine healthy tax competition among states or empower states to tax outside their borders. The bills wouldn’t create a new tax. They would merely allow an existing tax to be effectively enforced. Buyers are supposed to pay the sales tax when an out-of-state seller doesn’t collect it, but very few of them do so. Requiring sellers to collect the tax would simply enable states to exercise their undisputed right to tax their residents’ purchases.

{mosads}Moreover, a narrower tax base is not a smart way to limit the growth of government. Instead, the economic distortions of taxation should be reduced by moving to a broader tax base and lower tax rates. And in our view, it’s better for states to tax consumption, as sales taxes ideally try to do, than to discourage saving and investment by taxing income.

Unfortunately, the Senate bill doesn’t go far enough. Out of an exaggerated concern about compliance burdens on small sellers, it would permanently exempt from sales tax collection any online business with nationwide sales below $1 million. Such broad protections are unnecessary. Compliance will not be costless, but, with current technology, it should not be unmanageable.

If a carve-out for home-based sellers is included, $10,000 would be a more sensible cutoff than $1 million. Many small sellers use the electronic platform of a large e-commerce site, such as Amazon or eBay, which can handle the tax compliance on behalf of the sellers. Other relatively small sellers should be able to comply with the help of the free software. Moreover, the benefits of a more level playing field surely outweigh the costs associated with requiring more sellers to collect taxes.

The House bill is closer to the mark. It would grant a three-year grace period before small sellers selling from their own websites would have to collect sales tax, but would allow no grace period for those selling on electronic platforms. To promote tax neutrality, Congress should end Quill’s unfair tax advantage for online sellers, both large and small.

Consistent with conservatives’ federalist agenda, restoring states’ rightful tax authority would reduce their reliance on federal funds and empower them to finance their own agendas. And, such a move might facilitate more pro-growth state tax policy by limiting states’ need to raise revenues from income taxes.

Alex Bill is a research fellow at the American Enterprise Institute.

Alan Viard is a resident scholar at the American Enterprise Institute.

The views expressed by contributors are their own and are not the views of The Hill.