Senate to vote on bill to end sales-tax exemption on Internet commerce

The Senate may act to raise taxes today, and barely anyone knows about the effort.  A bill that would allow all states to collect sales taxes on Internet purchasers by their residents may get a floor vote today:

The days of tax-free online shopping could finally be numbered.

The Senate is planning to vote on a bill as soon as Monday that would give states the authority to collect sales taxes on all Internet purchases, handing local governments as much as $11 billion per year in added revenue that they are legally owed — but that hasn’t been paid to them for years. …

The bill introduced by Sen. Mike Enzi (R-Wyo.), called the Marketplace Fairness Act, would grant all states the power to collect taxes from out-of-state vendors selling goods to their residents.

“Legally owed”?  Yes, actually that’s true.  If you buy tax-free goods, you are supposed to declare them on your annual tax return, but states don’t bother to enforce that — because it would be impossible to do so.  The exemption on collection was created by Congress on interstate sales for the purpose of encouraging Internet investment and expansion, which shows that no one really expected states to ever collect those taxes, at least not at the time.

The Post notes how the exemption has bitten into brick-and-mortar sales, but misses a couple of important points:

Since before the dawn of Internet shopping, the basic rule was that as long as a retailer didn’t have a physical presence in the state where the consumer was shopping, the company wouldn’t have to collect a sales tax. Technically, shoppers are supposed to track these purchases and then pay the taxes owed in their annual tax filings. Few people, however, do this or are even aware of it.

The result: Online retailers have been able to undercut the prices of their non-Internet competitors for years. Over time, shoppers learned that they could browse products in the aisles of a Best Buy, only to click “purchase” on their smartphones for a tax-free deal from an Internet retailer.

However, unless you pay for an Amazon Prime membership or find other free-shipping deals, the amount saved in tax avoidance is lost in shipping costs and delayed receipt of goods.  The reason this became more attractive over time is the increase in sales taxes imposed by the states.  Also, other attractions for on-line sales is a much greater selection and better price competition, which in some areas brick-and-mortar retail can’t or won’t provide.

In the end, though, the question is one of equal application of the law.  Is it just to keep the exemption on tax collection almost twenty years after the commercialization of the Internet, which shows no sign of abating at all?  The competitive disadvantage for brick-and-mortar stores is real, and they’re already in big enough trouble without forcing them to collect taxes while their competition doesn’t.  Enzi’s proposal is certainly reasonable, and arguably necessary — and worthy of serious debate, which would be nice to see before a floor vote on the proposal.

Update: I’ve gotten a few e-mails asking why I didn’t argue to eliminate sales taxes altogether.  For one thing, that’s up to the individual states, not Congress. Not every state has sales taxes now, either.  Also, if more people have to pay sales taxes because of this effort, it could increase pressure in the various states to either reduce or eliminate sales taxes, although that hasn’t really been the case in the few states that have forced Amazon to collect the taxes.

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David Strom 5:21 PM on March 31, 2023