As state and federal capitals prepare for tax time, policymakers have the opportunity to investigate ways they can avoid adding to the tax burden of consumers who shop online.
Tomorrow at 10:00 A.M. ET, the U.S. House Committee on the Judiciary will hold a hearing titled, “Exploring Alternatives to the Online Sales Tax Issue.” This is an informational hearing featuring presentations from a panel of experts on tax policy, including former Congressman Chris Cox (R-CA) Andrew Moylan of the R Street Institute, and several tax law practitioners. The panel will likely explore various proposals presented over the years for an online sales tax. Anyone interested in the issue can watch the hearing live here.
By way of background, in the 1992 case of Quill v. North Dakota, the Supreme Court ruled that states may compel collection of sales tax only from businesses with a physical presence (i.e. stores, employees, warehouses, etc.) in those states. What this means for consumers is that unless an online retailer has a physical presence (or nexus, in tax policy parlance) in your state, the state may not compel the retailer to collect sales taxes from you; however, states can levy use taxes on taxpayers for purchases regardless of the source and 45 states currently do so. Reasons for this rule include preventing double taxation, avoiding confusion and preserving federalism (five states do not impose sales tax).
But over the years, as online commerce has grown into a multi-billion dollar industry and a way for consumers to have more choice in prices and states have found themselves strapped for cash, tax collectors and policymakers, encouraged by the competitors to e-commerce companies, have looked to online commerce as a potential new source for tax revenue, even though economists Robert Litan and Jeff Eisenach have found that expanding taxes to online sales would yield little additional revenue. Starting with New York, many states have enacted laws that aim to create nexus via online advertising, an approach ruled unconstitutional in Colorado and Illinois but upheld by courts in New York. Everyone, including courts, retailers, states and taxpayers, are now looking to Congress to use its interstate commerce powers to provide some clarity as to the rules for taxing sales conducted via the Internet.
Although the panelists’ remarks haven’t yet been posted, they will likely explore several current proposals to administer an online sales tax. The Marketplace Fairness Act, supported by traditional retailers, would allow states that belong to the Streamlined Sales and Use Tax Agreement to require businesses that operate in the state to collect sales and use taxes from out-of-state customers for the state and local jurisdictions in which the customer resides. Proponents argue the Marketplace Fairness Act would ensure fairness, but opponents argue this would subject small businesses and their customers to taxes and compliance costs for at least 9,600 tax jurisdictions. Another option is an origin-based tax system in which the tax is based on the origin of the seller rather than the buyer. While sellers would have to collect taxes on Internet sales, they would only be responsible for one tax, whatever is owed at the seller’s principal business location. Several states like Arizona and Texas employ this system in some form, but such a system could subject states like Delaware and New Hampshire—which are currently sales tax free—to new sales taxes.
One proposal likely to be discussed in detail is Rep. Bob Goodlatte’s tax principles. Goodlatte, chairman of the House Judiciary Committee and a likely leader on any resolution to the Internet sales tax issue, proposes any Internet sales tax proposal be guided by the notion of tax relief; tech neutrality; no regulation without representation; simplicity; tax competition; states’ rights and privacy rights. It is worth watching the hearing to listen to the discussion and reactions to these tax principles, especially since many of them are consistent with the American Legislative Exchange Council’s Principles of Sound Taxation, which seek to protect taxpayers and promote economic growth at the state level, and will likely influence whatever emerges from the committee’s hearings and deliberations on this topic. We will certainly be watching and thinking about what this Rep. Goodlatte’s proposal means for the states.
As a new tax season arrives, it is high time for policymakers to explore alternatives to the online sales tax issue.
John Stephenson is the Director of the Task Force on Communications and Technology at the American Legislative Exchange Council.