Plugging a Web tax loophole

The Internet isn’t a tax-free shopping zone; consumers just treat it like one. A bill by Rep. William Delahunt (D-Mass.) would make it significantly harder for people to evade sales taxes online, requiring Web-based retailers to collect sales taxes from more out-of-state purchasers. Although there are flaws in the details of Delahunt’s proposal (HR 5660), the overall approach is a good one. The measure wouldn’t impose a new tax or raise rates; it would simply take a more efficient and fair approach to enforcing the law.

At issue is a longstanding exemption the courts have given retailers from collecting sales taxes from shoppers outside the states where they have offices. In rulings that predate the Web, the Supreme Court declared that it would be too great a burden to require mail-order houses and other retailers with out-of-state customers to compute and collect sales taxes for every state and local government, which impose a myriad of rates and exceptions.

The rulings didn’t exempt online orders from sales taxes, however — most states require residents to pay “use taxes” on their online purchases as part of their annual returns. Few taxpayers comply, though, giving distant online sellers an unfair advantage over local retailers that have no choice but to collect the levy.

Despite their disproportionate impact on low-income families, taxes on consumption are an important part of the revenue mix for governments because, unlike income taxes, they don’t discourage savings or investment. It’s not fair to collect such taxes on goods bought from some retailers but not others. The only issue is whether collecting the tax would be so difficult and costly for out-of-state retailers that they would be driven out of the interstate market.

Delahunt’s bill would require online merchants to collect sales taxes from out-of-state shoppers only if they hail from states that have adopted the Streamlined Sales Tax Agreement. That agreement has led to the development of technology that automatically computes sales tax rates and submits the required tax filings. The bill doesn’t go far enough in protecting small online retailers from the cost of complying, and lawmakers should heed those concerns. But rather than having cash-starved states demand sales records from online retailers to determine which taxpayers aren’t paying the taxes they owe, as some states are doing, Congress should step in with a national solution. There’s no longer any excuse for Web-based merchants not to collect sales taxes from shoppers in any state that has adopted the streamlined sales tax.