The U.S. Senate is expected to vote next month on a bill that could require online retailers to collect sales taxes from customers in every state that imposes them. The measure has been bashed by opponents as a tax increase that would cripple small Web businesses. It’s not, and it won’t. Instead, the Marketplace Fairness Act would eliminate an outdated restriction that favors those who can shop online over those who can’t or won’t. That’s reason enough for it to become law.
For much of the last two decades, Internet retailers collected sales taxes only from customers in the states where they were headquartered or had employees. They based that approach on a 1992 Supreme Court decision that barred states from requiring retailers with no physical presence there to collect sales taxes for them. Such a requirement, the court reasoned in Quill Corp. vs. North Dakota, would unacceptably impede interstate commerce.
The point that’s often missed here is that the tax is owed by buyers, not sellers. And even with the Quill ruling, most states still required residents to pay taxes on out-of-state purchases as part of their annual tax returns. But the ruling made it extremely difficult for states to enforce that requirement, and not surprisingly, few people complied. Now, anyone with an Internet connection and a credit card can buy goods “out of state” without paying the tax they owe.
Sales taxes are an important part of the revenue mix for governments because they don’t penalize labor, savings or investment the way taxes on wages, dividends and capital gains do. The more sales that evade the tax, the more pressure lawmakers feel to raise the rate. That just makes things worse for consumers who buy locally and the retailers who serve them.
Today, Web-based software and services vastly simplify the task of collecting, remitting and reporting sales taxes across the country. The bill proposed by Sens. Michael B. Enzi (R-Wyo.) and Richard J. Durbin (D-Ill.) would let states seek sales taxes from remote sellers only if the states provided free software to manage tax collection and reporting, among other steps to simplify compliance. The bill also exempts retailers with less than $1 million in annual sales, which is a reasonable carve-out for small businesses.
Some online retailers evidently want the public to believe that the Internet is a giant duty-free mall because it gives them a competitive edge over local stores. That’s just not true, but the lack of compliance results in a tilted playing field that hurts local retailers and the people who rely on them. As long as a state taxes sales, all of its residents should be subjected to them equally, regardless of where they shop.