On-Line Sales Tax Debate a Dilemma for Conservatives

News that a group of influential conservative governors had joined together to support legislation that would allow their states to collect sales taxes from online purchases has set off a debate amongst conservatives about the “right” position on this issue which promises to heat up by the end of the legislative session.

This is an issue that needs to be explored.

Supporters of the legislation like Gov. Chris Christie and Gov. Bob McDonnell, known as the Marketplace Equity Act (HR 3179), argue that current law creates a two-tiered playing field — one for small mom-and-pop businesses and one for Internet giants like Amazon.  That’s because current law does not allow states to collect sales taxes on the sales where the seller does not have a physical location within the state.  Supporter argue that enactment of the legislation would not constitute a new tax but would just close a loophole and enforce current law equally.

Opponents, like the Heritage Foundation, argue that “consumers [should] decide where and how they shop, and are free to find the best deal, which forces businesses to compete with one another in order to acquire such purchases.  But when government gets involved, those who are unwilling to compete in the free market are given advantages, by way of forcing their competitors to increase their prices, instead of the original business decreasing their costs.” 

That is an interesting take.  But doesn’t that describe the system we already have, that supporters of new proposal want to fix? The government currently mandates price increases on local business that they don’t mandate on online business. Isn’t government picking the online retailers as winners and the brick and mortar businesses as losers under current law? And how is it that the “original business” is supposed to “decrease their costs”? Is there some proposal to reduce sales tax rates?  Because no matter the innovation from local business, the government still requires their mark up on the sale but does not require the same for online businesses.

Unfortunately, the government is already involved in the marketplace and is currently treating two similarly situated businesses completely different through tax policy. Government policy makes the same behavior criminal for one and legal for another.  If a Main Street bookseller reduces their price by not collecting sales tax, they go to jail. Yet government allows online stores to do so with no penalty.

So, what is the conservative position?   

Unlike most tax issues, this one is not cut and dry. Sentiment seems fairly split so far and this issue will require some thoughtful reflection rather than emotional reaction to resolve.  But one thing seems fairly clear: under current law government is imposing price increases on some business and not others. And that sounds a whole lot like government distorting the market place and picking winners and losers.