In May, the U.S. Senate voted 69-27 to approve the Marketplace Fairness Act (S. 336 and H.R. 684), which gives states the power to collect sales taxes from out-of-state businesses (primarily Internet and catalog retailers). Currently, states are constitutionally limited to taxing a sale only if the seller has property or employees located in the state. Absent this rule, states could require taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collection by any seller anywhere in the world. Opponents of the bill were senators from states without a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. and every Republican senator under the age of 50. Most conservative and libertarian activist organizations opposed the bill; supporters included state officials, large retailers, and Amazon.com. (My testimony explaining the MFA and issues behind it is here.)
Since then, all eyes have been on Rep. Bob Goodlatte (R-VA), the chairman of the House Judiciary Committee, because any further action would require his say-so. Goodlatte said he was researching the issue, and this week released a set of principles that he believes any Internet sales tax bill should meet. Goodlatte’s list:
Basic Principles on Remote Sales Tax
1. Tax Relief – Using the Internet should not create new or discriminatory taxes not faced in the offline world. Nor should any fresh precedent be created for other areas of interstate taxation by States.
2. Tech Neutrality – Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses.
3. No Regulation Without Representation – Those who would bear state taxation, regulation and compliance burdens should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement.
4. Simplicity – Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.
5. Tax Competition – Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-a-vis their foreign competitors.
6. States’ Rights – States should be sovereign within their physical boundaries. In addition, the federal government should not mandate that States impose any sales tax compliance burdens.
7. Privacy Rights – Sensitive customer data must be protected.
Our list isn’t much different. Let’s evaluate the MFA bill on each of Goodlatte’s principles.
1. No Further Expansion of State Tax Authority – Unlike previous year’s versions, the MFA now explicitly states that states can only impose their existing general sales and use tax to Internet transactions, and that the bill does not enlarge state taxation authority for any other tax or in any other way. (States have been pushing their authority beyond their borders in all areas of taxation.) Whether passing this bill will create a policy precedent for expanded state tax authority over the Internet is less measurable.
2. Neutrality – This is probably the biggest sticking point. Under the bill, Internet and catalog retailers would have to collect sales tax and comply with confusing sales tax rules for every jurisdiction where they sell (presumably, many or most of the 9,646 U.S. jurisdictions with a sales tax). By contrast, brick-and-mortar stores pay attention to sales tax only where the store is physically located, since customers come to them. (Retailers with both brick-and-mortar and online sales–“brick & click”–get hit with both, following unsuccessful legal efforts in past years to escape, and are usually the most eager for something to pass Congress.) This disparity will continue so long as it’s harder to comply with 9,646 sales taxes than it is to comply with 1 sales tax. So let’s come back to this on #4. Of course, there’s a disparity now as Internet retailers face less of a burden than other retailers.
3. Enforcement – The MFA provides no mechanism for challenging a state that is not in compliance with the Act. The bill could be amended to permit federal court jurisdiction over disputes.
4. Simplicity – This is where the bill has made the most progress, and measuring whether it’s enough is probably a disputed point. The bill does require states to issue free calculation software to retailers, provide notice of rate changes, and forbids local jurisdictions from designing different sales tax bases from the state tax. But the bill let’s states play games with defining taxable and non-taxable items, leaves untouched a mess of local rates that cross across zip codes, and provides no mechanism for keeping states complying with what simplification is in the bill. Instead, the bill offered a two-tier approach, exempting businesses with Internet sales below a certain threshold. I fully agree with Goodlatte’s view (and told him when I testified to his committee) that this exemption is wrong and we should focus on simplifying, not escaping, these burdens.
5. Competition – A couple of things come to mind.
First, the whole idea of “use taxes” — taxing the use of an item bought outside the state — is to “equalize” the sales tax on purchases made within a state with purchases made outside the state. I think that’s wrong; why should D.C. get to tax a pair of shoes I bought in Delaware when I was in Delaware? Most Americans either are unaware of this tax obligation and usually still defy it even when they are made aware of it. Use tax is a joke in the state tax community because it’s so unenforceable and rarely paid. But the Supreme Court disagreed with me and ruled them constitutional in the 1930s.
Second, most other countries have VATs, which tax imports and exempt exports. We don’t have such a tax, and state sales taxes don’t exempt exports. (The use tax is the attempt to tax imports.) So our retailers are already at a disadvantage because purchases of our exports are taxed by other countries, and we’re not effectively taxing the purchase of imports here. There’s not really a solution to this, because we’re not getting a national sales tax anytime soon, and we don’t want states able to start taxing international trade flows.
Those points, though, are probably irrelevant to the conversation. Third and most importantly, the bill does not infringe on state power to set rates. It still let’s states pick what to tax and what not to (which both creates a lot of sales tax complexity for interstate sellers, and amuses foreign visitors to the Tax Foundation who are surprised we let states do this – most other countries let states impose whatever tax rate they want on a single, uniformly defined sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. ). The MFA will not restrain this competition between states for lower taxes.
6. The states are the best judge of whether MFA interferes with their authority, and they love the bill. I don’t know what Goodlatte is referencing in the second sentence.
7. MFA has no privacy provisions. Some state-level bills forcing Internet retailers to disclose their customers’ purchase information to revenue authorities have been struck down for violating the First Amendment.
All in all, Goodlatte’s principles will help focus the debate on what type of bill should pass, and he should be commended for them. Now we wait to see what proponents and opponents of the bill have to say. So far, everyone is praising them.
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