The return of the online sales tax wars
posted at 1:01 pm on September 21, 2013 by Jazz Shaw
While I originally thought it looked like one of the most dry, wonkish subjects of political discussion imaginable, the Marketplace Fairness Act and the idea of expanded online sales taxes turned out to be among the more hotly contested and debated subjects we’ve covered here in a while. (It also proved a very educational experience for me, largely through the contributions of our readers.) But when the dust settled this summer, the entire debate seemed to result in little more than an exercise in futility. The MFA passed the Senate by a rather wide margin and then promptly ran into a brick wall in the House. Since then it was seemingly forgotten.
But this week the Wall Street Journal raised that ghost from the past and predicted that new life was being injected into the project by the head of the House Judiciary Committee.
Supporters of federal Internet sales-tax legislation see new momentum for the bill, as a key committee chairman prepares to release principles for crafting the House version, possibly as soon as Tuesday…
Now, House Judiciary Chairman Bob Goodlatte (R., Va.) is preparing to release principles to guide his committee’s drafting of its own version in the coming months, according to lawmakers and lobbyists. Rep. Steve Womack (R., Ark.), a proponent of the measure, said last week that Mr. Goodlatte told him he would be releasing those principles “very soon” as a “roadmap” to formulate the House version of the legislation.
Sure enough, Goodlatte published his seven principles for consideration of any such legislation a few days later. And here they are:
1. Tax Relief – Using the Internet should not create new or discriminatory taxes not faced in the offline world. Nor should any fresh precedent be created for other areas of interstate taxation by States.
2. Tech Neutrality – Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses.
3. No Regulation Without Representation – Those who would bear state taxation, regulation and compliance burdens should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement.
4. Simplicity – Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.
5. Tax Competition – Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-a-vis their foreign competitors.
6. States’ Rights – States should be sovereign within their physical boundaries. In addition, the federal government should not mandate that States impose any sales tax compliance burdens.
7. Privacy Rights – Sensitive customer data must be protected.
At first glance, I’m not sure if this really allays the completely valid concerns that so many people have expressed over the MFA. Even keeping in mind that this is not legislation being pitched by Goodlatte, but rather a general set of guidelines to follow if there is to be a new bill, it would seem that there are still questions to be answered. Then again, if the editorial board of the LA Times is against the idea, maybe it’s not all bad. Their chief complaint seems to center on the idea of states’ rights listed in principle number six.
This principle alludes to an idea advanced by some libertarians, which is to have the sales tax rate set by the seller’s locale, not the buyer’s. In such an “origin-based” sales tax system, the seller would have to know only one jurisdiction’s rates and remit taxes just to one state, and face the prospect of only one state audit.
That idea is wrongheaded on so many levels, though, it’s hard to know where to start.
Most important, it misconstrues why states impose sales taxes. The point is to spread out the public’s tax burden so that it also falls on consumption, not just labor and investment. That’s one reason sales taxes are imposed on buyers, not sellers, and on goods instead of services. (Note that many of the folks arguing for origin-based taxation also want to replace income taxes and capital-gains levies with consumption taxes because they’re less damaging to economic growth.)
With that in mind, it makes no sense at all for buyers to pay sales taxes to the states where they shop, not the states where they live. Such a shift would rob the buyer’s state of taxes that were intended to support the government services the buyer receives, such as schools, police and street repairs.
While that sounded good on paper at first – even to me – many of you have pointed out the inherent flaw in that argument. In order for the “spare the pain of other taxes” theory to pan out, we are left to trust the states to actually lower (or at least fail to raise) their other taxes once the online sales revenue is in hand. To say that conservatives view that prospect dubiously would be an understatement.
So, given the experience that many of you bring to the table on this subject, what do you think? Does Goodlatte have something to work with here, or is it just the same wolf in a different sheep’s clothing? Obviously it’s tough to say for sure without seeing some final legislative language, but is there anything there which would allay your chief concerns, or is this idea just pretty much dead on arrival?