By Alan McQuinn When governments levy taxes on businesses or consumers, they should do so in a fair and consistent manner. And yet, when consumers make purchases with online retailers they do not always have to pay the same taxes that they would pay in their brick-and-mortar counterparts. Originally, there was a very good reason for this exemption: with thousands of different tax jurisdictions in the United States, it would simply be too impractical to require e-commerce sites or mail-order catalog businesses to abide by so many different tax rules. But since 2000, states have been working diligently to simplify their tax codes and developers have created software capable of handling the complexity of remitting taxes to multiple jurisdictions. It is now feasible for remote sellers to pay the same taxes as local ones. The next step is for Congress to pass legislation that would enable states to tax goods equally no matter how they are sold.
The Supreme Court ruled in 1992 that because of the complexity involved in adhering to thousands of tax jurisdictions, states can only require companies with a physical location within their borders to remit sales taxes. This meant that states could tax the sale of goods from businesses within their jurisdiction, but could not do the same for the sales of goods from businesses across state lines. However, Congress can override the ruling if it decides that circumstances have changed. Indeed, the Supreme Court rendered this decision in 1992, well before the growth of e-commerce, the simplification of state tax codes, and the development of software needed to implement tax rules for multiple jurisdictions.
The tax rules today give online retailers an unfair advantage over brick-and-mortar retailers. When considering what product to buy, consumers would likely make the economically rational choice, and go with the option that costs less. Therefore, this policy is the functional equivalent of subsidizing one business model (Internet retailers) at the expense of another (traditional retailers). States should have the authority to dismantle this disparity by taxing the sales of products purchased over the Internet (or by phone or mail), if for no other reason than as a matter of fairness.
The only thing standing in the way of fixing this problem is the complex state tax system. To address this, states have put forth a concerted effort to simplify it. In 2002, 44 states and the District of Columbia approved the Streamlined Sales and Use Tax Agreement (SSUTA)—a framework for a simplified state tax system—with the expectation that, in exchange, the federal government would grant this authority. To date, 23 states have adopted the entire proposal, with one state, Tennessee, adopting most of it.
Rep. Jason Chaffetz, R-Utah, and a group of bipartisan lawmakers recently introduced a new bill, the Remote Transactions Parity Act (RTPA), to address this issue by allowing states to charge sales taxes for purchases made from remote sellers, including e-commerce websites, as long as they either join the SSUTA or abide by the minimum simplification requirements. States permitted to collect taxes under this legislation would require remote sellers to collect taxes based on where the customer lives not the location of the seller.
As part of the simplification requirements, the legislation would, among other things, require states to create a single entity responsible for all sales taxes within the state, offer a single tax return for remote sellers, and create a downloadable taxability matrix listing the rates for all goods and services. RTPA also requires states to provide free access to certified software, makes the certified software providers primarily responsible for responding to audits, and includes phase-in provisions for small businesses designed to acclimate them to this new regime.
Unfortunately, similar bipartisan legislation has encountered several difficulties in Congress. In 2013, despite passing overwhelmingly in the Senate, the Marketplace Fairness Act of 2013—which differs from RTPA in a number of ways including audit requirements and phase-in provisions—never earned a vote in the House. In addition, many members of Congress are wary about anything they believe could “tax the Internet” or “raise taxes.” But rather than giving in to this bumper-sticker debate, it is incumbent upon Congress to ensure that government obligations, like taxes and regulations, do not unfairly burden one type of business model over another.
All tax policy, including Internet tax policy, should reflect what is sold and not how it is sold. The RTPA would create a framework that overcomes the complexities of taxing e-commerce and aligns with this goal. Congress should move quickly to take up debate on this bill, and restore the balance in state obligations between online retailers and brick-and-mortar companies.
Alan McQuinn is a Research Assistant for the Information Technology and Innovation Foundation.
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