In this second part of the halftime report for Tax Foundation Forum: Making Sense of Profit Shifting, we discuss the key takeaways from the first half of our series on profit shifting (read part I here). In this post, we...
- U.S. News uses Joseph Henchman's piece on Online Sal...
U.S. News uses Joseph Henchman's piece on Online Sales Taxes
With Online Sales Tax, States Can Collect Revenue They Are Owed
A free enterprise system shouldn't allow an unfair tax system
By STEVE WOMACK
Sales and use taxes were designed to be collected in the least burdensome, most efficient fashion—by the retailer. In 1977, this was limited by Complete Auto Transit v. Brady, which said that a state may tax interstate commerce only if there is a sufficient connection—or nexus—between it and the taxpayer. In 1992, Quill Corp. v. North Dakota defined a nexus to be a physical presence or employees based in a state.
But that was 20 years ago, when the way by which the Internet would drastically change the retail industry was unfathomable. It is time for modernization.
Today, a significant—and growing—portion of sales are made via the Internet. While brick-and-mortar businesses collect taxes at the time of sale and remit them to the political subdivisions that levy them, online-only retailers do not. In some areas, this awards online-only retailers the guise of a 10 percent price advantage. However, these sales, by and large, are not tax-free.
Currently, 46 states have sales and use taxes in statute and require individuals to report and pay them on 'untaxed' online purchases at year-end. In practice, this is done 0.3 percent of the time, leaving buyers exposed to potential audit issues and states shortchanged to the tune of $23 billion annually. With 42 states and countless local governments facing budgetary shortfalls this year, we must allow them to efficiently and effectively collect the revenues they are already owed. If ignored, these state and local governments will eventually be forced to raise other taxes.
Prior to serving in the U.S. House of Representatives, I was the mayor of Rogers, Ark. During my tenure, I witnessed first hand just how crucial sales tax revenues are. They enabled Rogers to invest in infrastructure and development, creating thousands of jobs and a booming economy and making Rogers one of America's most livable cities.
The Marketplace Equity Act provides a common-sense solution to the online sales tax collection dilemma. By removing federal restrictions and regulations that prevent states from enforcing their tax laws, MEA levels the playing field between brick-and-mortar businesses and online-only retailers and allows customers, not the federal government, to pick marketplace winners and losers.
The bill empowers states to shift tax-reporting responsibilities to the vendor—rather than the purchaser—while allowing them to decide how best to do it with two important safeguards. It requires states to provide businesses the necessary software for tax collection and exempts small businesses to protect those that would be truly burdened.
In Quill, the Supreme Court said the maze of state and local sales tax rules was too complicated and onerous to require retailers to collect taxes where they have no nexus. I agree. Prior to the same technological advances that have made "e-tailing" possible, tracking and remitting these taxes would have absolutely been a burden on businesses. But today, technology that enables a quick, efficient way to calculate taxes due already exists.
A free enterprise system should not allow this unfair tax "policy" to encroach on consumer decision-making, which should be based on price, selection, convenience, and consumer preference. The Supreme Court justices understood that in 1992. That's why they did not close the door on the issue. Rather, the justices invited Congress to "decide whether, when, and to what extent" states could require the collection of taxes on remote sales.
It's time Congress RSVP'd that invitation.
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