Online tax collection: It’s what’s in the House

This post has been corrected, as indicated below.

A House committee holds a key hearing Tuesday on a bill that its opponents say would tax the Internet: the Marketplace Equity Act, a bipartisan proposal to let states require online merchants to collect and remit sales taxes. But as The Times’ editorial board has argued repeatedly, this isn’t about imposing a new tax; it’s about increasing compliance with existing law.

As in most (if not all) states, California law requires people to pay taxes on any non-tax-exempt item they buy here, regardless of whether they shop online, via mail order or in person. Proposals such as the Marketplace Equity Act (a.k.a. HR 3179) would require online retailers to help people comply with state law by collecting such taxes for shoppers, instead of leaving them to be paid as part of the shoppers’ annual income tax returns.

Considering that different cities and counties impose different tax rates and exempt different items, HR 3179 would impose an administrative burden on e-tailers that’s greater than the one on local stores, who only have to contend with one city’s rules. To address that issue, some critics of the bill call for a different approach: Instead of collecting use taxes from their buyers and remitting them to the buyers’ home states, online retailers should collect sales taxes in their place of business. Under this “origin-based” approach, an e-tailer based in North Dakota, for example, would collect and remit sales taxes to North Dakota for all its sales.


In addition to its simplicity, this method would help states and cities with low sales taxes attract e-tailers. That competition, in turn, would put pressure on localities with higher taxes to reduce them. That’s the theory, at least.

One problem with the “origin-based” system, though, is that it raises the likelihood of double taxation. State use-tax laws would still be on the books -- and given the condition of many states’ budgets, those aren’t likely to go away -- so consumers would still have the obligation to pay use taxes on the items they bought online in addition to the sales taxes collected by the website. A bill to impose origin-based sales taxes online might seek to pre-empt state use taxes, but such an effort would likely draw stiff resistance from many of the 22 states that require residents to report and pay them on their income tax returns.

Another problem is the dicey politics of an origin-based approach. The push to require e-tailers to collect taxes is coming largely from states and cities worried about online sellers eating into their tax bases. The fact that HR 3179 is moving at all in the House reflects the support it has gained recently from such noteworthy Republican governors as New Jersey’s Chris Christie and Iowa’s Terry Branstad. Imposing an origin-based system wouldn’t answer most of those states’ tax-base concerns.

The governors also have echoed the concerns of brick-and-mortar retailers, which contend that online-only retailers have an unfair advantage because they don’t collect taxes and their shoppers don’t pay them. An origin-based system wouldn’t level the playing field, particularly if sites set up shop in no-sales-tax states such as Oregon or Delaware.


The big dog on this issue may still be, the largest online retailer. Amazon used to fight the states’ efforts to force it to collect use taxes, even in states such as California where some of its subsidiaries are based. It abandoned those efforts last year and is slated to start collecting use taxes on sales to Californians and Pennsylvanians in September. It now wants other e-tailers to face the same burdens, whether the system is origin-based or not.

[For the Record, 8:57 a.m. July 26: The original version of this post said that Amazon had distribution centers in California. Some Amazon subsidiaries are based in California, and it has announced plans to locate fulfillment centers in San Bernardino and Patterson. But as of today, it has no distribution centers in the state. Thanks to Amazon’s Scott Stanzel for pointing that out.]


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