The online sales tax cash grab
“Finally, someone in Congress has drafted an approach to the Internet sales tax issue that doesn’t empower bureaucrats to tax across state lines and saddle Web-based retailers with enormous complexity,” says Andrew Moylan, executive director of the pro-market R Street Institute. Moylan was alluding to the Marketplace Fairness Act, the states’ preferred alternative to Goodlatte’s bill. The act, which passed the Senate in 2013 but died in the House, would have allowed states to levy sales taxes based on buyers’ locations.
As Moylan notes, that “would force online sellers to comply with the tax rules of as many as 9,998 different taxing jurisdictions nationwide, imposing huge compliance burdens and opening them up to audits from all 46 states with statewide sales taxes.” It would also destroy tax competition by giving “state-level ‘IRS’ agents the unprecedented power to enforce their tax obligations on businesses all across the country even if [the businesses] lack a physical presence within [the agents’] jurisdiction.”
… Mitigating this problem from a customer’s point of view is that the incentive remains to buy from sellers in low-rate states. And as R Street’s Moylan notes, “cutting checks by formula” is one of the few things the government is good at.
The much bigger drawback is that Goodlatte’s bill would impose taxes on customers buying from businesses in states that do not have a sales tax at all, such as Delaware and Oregon. A business in any of those states would be required to collect taxes from out-of-state buyers using the lowest combined state and local rate in the country. (At the moment, Wyoming takes that prize with a combined sales tax rate of 5.49 percent.) This provision, which is likely intended to grab more revenue, defeats the point of having an origin-based tax, since it forces certain businesses to collect taxes when they otherwise would not have to.
“The proposal would be improved substantially,” Moylan says, “if it better protected sellers in non-sales-tax states (perhaps by allowing them to opt out of any collection scheme).” He also suggests other changes, such as passing legislation to impede the silly abuses allowed by affiliate nexus laws. But ultimately, Moylan thinks a version of Goodlatte’s proposal would be “an enormous victory for the cause of sanity in taxation. It would solve the Internet sales tax debacle without imposing a cure worse than the disease and it would help reestablish borders as limits to tax state tax power.”