Online sales taxes: <i>not</i> taxation without representation

The latest argument from those who oppose sales taxes on Internet purchases is that it’s “taxation without representation.” Where did this counterfactual meme come from, and how do we kill it?

A typical example is an op-ed in Wednesday’s Wall Street Journal by Sen. Jim DeMint (R-S.C.), whose anti-tax fervor seems to have clouded his ability to reason. He argues that requiring online merchants to collect and remit sales taxes just like their brick-and-mortar brethren would violate the “bedrock principle” that “citizens should not be taxed by governments in which they have no political voice.”

I’m fond of that principle too, but it’s irrelevant to online sales taxes.

At issue here is how to enforce state laws that require buyers to pay taxes on the items they purchase. Purchases made locally are taxed at the point of sale. Those made out of state are taxed when the buyer pays income taxes. Technically, the latter are “use” taxes, not “sales” taxes, and not every state imposes them.

Just to be clear here, the buyer is the one paying the tax; the online retailer is merely remitting it after collecting it from the buyer. And under the Marketplace Fairness Act pending in the Senate and the Marketplace Equity Act in the House, the amount and terms of the tax would be set by the buyer’s home state. In other words, the buyer would be paying taxes to the state where the buyer votes.

People are supposed to be paying those taxes now. They just don’t, often because they’re blissfully ignorant of the use-tax law. Indeed, many people shop online because they think it’s a tax-free zone. In keeping with a 1992 Supreme Court ruling on mail-order catalogs, e-tailers charge sales taxes only on purchasers from states where they have their headquarters, a branch office or a distribution center. But that ruling applied only to a retailer’s obligation to collect taxes (in the pre-World Wide Web, pre-cloud computing era), not to the obligation by shoppers to pay them.

The fact that online retailers don’t have to collect sales taxes from many of their shoppers gives them an unfair competitive advantage because it makes their prices seem lower. It’s a wink-and-a-nod discount: retailers don’t collect the tax, knowing full well that the vast majority of buyers won’t pay it on their own.

Opponents can complain that the online sales tax bills would effectively raise taxes because most states have done a poor job enforcing their use-tax laws. They can also howl about the burden on e-tailers who would have to use new software to match buyers’ addresses with the applicable use-tax terms. But they can’t argue that it’s taxation without representation, because it just isn’t.

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