Wednesday, May 1, 2013

Are Online Sales Taxes Only Fair?

Are Online Sales Taxes Only Fair?:
At a 2008 shareholders meeting, Amazon founder and CEO Jeff
Bezos explained why he opposed requiring businesses like his to
collect state and local taxes on their interstate sales. "We're not
actually benefiting from any services that those states provide
locally," Bezos
said
, "so it's not fair that we should be obligated to be their
tax collection agent."
Last year Paul Misener, Amazon's vice president for global
public policy, testified in favor of a bill allowing states to
demand sales tax from online merchants, saying Congress should
"level the playing field for all sellers." As that switcheroo
suggests, there are plausible fairness arguments on both sides of
this issue. And although there is a way to bridge the gap, it is
not the route Congress seems intent on taking.
The Marketplace
Fairness Act
, which Congress is expected to
approve
soon, sounds like something out of an Ayn Rand novel.
But it reflects understandable complaints from brick-and-mortar
retailers who believe their online competitors have been enjoying
an unfair advantage for way too long, thanks to Supreme Court
rulings
that bar a state from requiring a business to collect sales tax
unless the company has a physical presence in that state.
Shoppers are still legally obligated to pay their state's sales
tax on items they buy online, but few are aware of this notional
requirement and even fewer comply with it. The upshot is that
online sales are effectively tax-free, unless you happen to live in
the same state where the merchant is located.
At the average combined state and local tax rate, the
savings amount to about $9 on a $100 purchase. That's not a huge
difference, but it helps online merchants (and hurts their offline
competitors) to the extent that it makes people care less about
shipping charges.
At the same time, companies with customers throughout the
country are understandably worried about complying with the
multifarious demands of the
9,000 or so
jurisdictions that have the authority to impose
sales taxes. That burden is less daunting to big companies like
Amazon (which might even be said to enjoy an unfair advantage in
that respect) than to their smaller competitors. In partial
recognition of that reality, the Marketplace Fairness Act exempts
merchants with less than $1 million in annual out-of-state
revenue.
The bill seeks to reduce the compliance burden by requiring each
state to offer free software allowing merchants to calculate sales
tax and file a single return for all taxing authorities within the
state. States could not audit a business more than once a year.
Still, that's 46 returns (45 states with sales taxes plus the
District of Columbia), which have to be
filed
monthly or quarterly, and 46 potential
audits
every year, not to mention all the misunderstandings,
disputes, and hassles that fall short of an audit. You can start to
see why the Supreme Court
deemed
collection of sales taxes from remote vendors an
unconstitutional burden on interstate commerce.
But the Court also said Congress, under its power to regulate
interstate commerce, could authorize such tax collection, which is
what it is poised to do. Unfortunately, it has overlooked a
simpler, fairer, and smarter way of letting states get the revenue
they crave.
In a
2011 paper
published by the Mercatus Center at George Mason
University, Veronique de Rugy and Adam Thierer recommended "an
'origin-based' sourcing rule for any states seeking to impose sales
tax collection obligations on interstate vendors." Under that rule,
which mirrors what happens when you buy something while visiting
another state, each business collects sales tax on behalf of the
state where it is based, no matter where the customer happens to
be.
The beauty of this approach is that it treats all retailers
equally, eliminates the daunting challenge of dealing with many
different taxing authorities, and respects state policy choices
while encouraging tax competition between jurisdictions. Evidently
the idea makes too much sense for Congress to consider.