Today, the House Judiciary Committee is holding a hearing on the Marketplace Fairness Act, a bill that would essentially force on-line retailers to collect and remit sales taxes on consumers' purchases. Due to a series of Supreme Court decisions, on-line (as well as catalogue) merchants are not required to collect sales taxes unless they have a real "physical presence" in the state or locality levying the tax. There are lots of very good reasons for this. But, there are other very good reasons for rethinking how we apply the sales tax. It is difficult to argue that that manner of a transaction should dictate whether or not its taxable.
Let me first say that I cut my policy teeth on this issue back in the 1990s. At that time, state associations and retailers launched a massive effort to get Congress to overturn the Supreme Court precedent and force the application of sales taxes to on-line purchases. To say I was a strident opponent of those efforts is a gross understatement. I wrote papers, did media appearances and testified often against these proposals. Part of it was my natural antipathy towards taxes, but most of it was the realization that having to comply with every state or local sales tax was an unbearable burden on on-line retailers.
There are thousands of taxing jurisdictions in this country. Keeping up with the specific rates in each is a big enough challenge, but keeping up with their specific application is herculean. In Tennessee, for example, boots bought for work are not taxable, but those bought for other reasons are taxable. There are literally thousands of carve-outs like this littered throughout state and local sales taxes. A company like Amazon might have the means and resources to sort this all out, but small on-line boutiques and small businesses would be overwhelmed.
That said, its politically hard to argue that a certain class of transactions should be exempt from taxes, simply by the nature of how the transaction takes place. Exempting on-line sales from taxes does put brick-and-mortar businesses at a very real disadvantage. And, with a larger share of transactions moving on-line, there is a very real erosion of state and local tax bases that puts pressure on increasing other taxes to make up for the lost revenue.
I still think, on balance, the arguments against applying sales tax collection on on-line merchants win out, but I recognize that, as more and more commerce moves on-line, its a politically untenable position. Fortunately, there is a very simple solution. We should simply apply our current sales tax regime to on-line sales. In other words, you pay whatever sales tax is levied where that business is located.
I live in Virginia. When I travel into DC or, god forbid, Maryland, and make a purchase I pay whatever sales tax that jurisdiction levies. I do not say, "Excuse me, I live in Virginia and our sales tax is only 4%, so please charge me that, instead of the 10% DC charges." My state's sales tax doesn't follow me when I travel. So, why should it follow me on-line?
The local bookstore down the street from me only has to worry about complying with the single sales tax rate levied by my town and state. Why should an on-line retailer have to comply with every sales tax in the country? If the goal of applying the sales tax to on-line sales is to "level the playing field" with brick-and-mortar businesses, how is putting an additional burden on on-line merchants "fair." Applying the sales tax, at the point of purchase for on-line sales, i.e. wherever the e-tailer is located, simply extends our current sales tax regime to the on-line world without undue collection burdens. As an added bonus, it would be completely constitutional.