The debate in Washington over taxing Internet sales should be about one thing: fairness.
If you buy a book or a blouse at a physical store, you pay sales tax. If you don’t pay the same tax at an online store, the government is favoring one kind of business over another. That’s not only unfair, it’s also bad for the economy.
As the U.S. Senate takes up the Marketplace Fairness Act, however, many people are trying to confuse the issue. You’ll hear Internet companies such as eBay talking about how this is really about big-box stores trying to punish small businesses that sell online.
Some Republicans, meanwhile, take the position that the bill amounts to a tax increase, something they’ve pledged to oppose.
That’s misguided. If the IRS hires more agents to beef up enforcement, it might bring in more revenue but it wouldn’t be raising taxes. It would simply be collecting what’s already owed.
The same applies to Internet sales. Most states have a use tax, which online shoppers are supposed to calculate and pay once a year. Hardly anyone pays, and states have no way to enforce it.
(In Missouri, the Legislature is trying to make sure there’s no overall tax increase. Both houses have voted, as part of bigger tax bills, to cut the state’s income tax by an additional one-third of a percentage point if the Marketplace Fairness Act passes.)
Ebay says collecting sales taxes would be burdensome, but the Senate bill addresses that complaint. It exempts any business with remote sales of $1 million or less, and requires states to provide free software for calculating the tax. It also shields sellers from liability for any errors caused by the software.
Alan Viard, a senior fellow at the American Enterprise Institute, thinks the bill’s authors have done plenty to ease the compliance burden.
“If you’re selling a million dollars’ worth of goods online, you ought to be able to use software to comply,” he says. “It’s paradoxical that people who make their living selling over the Internet say, ‘Gee, it’s so complicated to deal with computer software to do this.’”
Online firms raise another red herring when they say that, unlike brick-and-mortar stores, they don’t consume any local services. The sales tax is levied on citizens, not stores, and citizens consume local services even if they do all their shopping from the comfort of home.
The fairness issue has been around since at least 1992, when the Supreme Court ruled that retailers didn’t have to collect sales tax, except in states where they had a physical presence. That was always an arbitrary rule, but the money wasn’t huge when long-distance shopping involved printed catalogs and toll-free phone numbers.
Now, in the era of online shopping, estimates of lost state and local revenue range from $11 billion to $23 billion. Missouri misses out on collecting $480 million a year, according to a University of Missouri study.
At a time when many state and local governments are strapped for cash, the money alone is a compelling reason to reconsider the tax status of Internet sales.
However, contrary to what some anti-tax Republicans are saying, it isn’t the only reason or even the best reason. Fairness requires that we treat big Internet retailers the same way we treat a mom-and-pop corner store. Nobody likes collecting (or paying) taxes, but that’s precisely why everyone needs to share the pain.