The Senate did something surprising Monday. It voted to clear the way for passage of a bill to raise taxes—and not on party lines, either. Seventy-four senators voted for cloture, and 24 were Republicans. What’s more, this is a bill that will raise taxes not on the rich but on a broad swath of middle-class Americans. And it won’t do anything to reduce the deficit or increase federal revenues. Welcome to the exciting world of online sales taxes, an issue in which the hyper-polarized politics of the 21st century give way to old-school deal-making, pragmatism, and parochialism.
The issue at hand relates to what Tim Fernholz calls large-scale “accidental Internet tax evasion.” Online shoppers have been engaged in it for the past 10–15 years. Most states and some municipalities in the United States depend on retail sales taxes for revenue. And if you look up those laws, you’ll find that in theory you’re generally supposed to pay sales taxes to the state where you live on everything you buy even if you got it from another state or bought it on the Internet. In practice, of course, nobody does this.
Until recently, cross-border shopping wasn’t economically significant, and no enforcement mechanisms existed to compel you to pay taxes back in your home state. Then came the Internet.
Amazon and its fellow travelers are a big deal economically. When the government first started collecting data on e-commerce in 2000, Internet sales were just 2 percent of all retail sales. Today that’s leapt to 16 percent and is still rising fast.
States are seeing their tax base melt away. Enter the Marketplace Fairness Act, enthusiastically pushed by big-box retail chains and Sen. Dick Durbin of Illinois, who partnered with retailers to beat banks on the question of debit card swipe fees several years ago.
The Marketplace Fairness Act requires states to simplify and harmonize their tax rules. More importantly, it requires businesses with more than $1 million in Internet and catalog sales to pay sales taxes in the states where their products are shipped. The federal government won’t actually be collecting any taxes, but it will be putting its logistical muscle behind state efforts to do so.
Previously, the only way states could enforce sales tax laws was if an Internet retailer had some kind of physical presence in the state.
This led to a raging series of state-level battles over Amazon, battles that ultimately led the Internet’s No. 1 retailer to switch sides and endorse the taxes. Amazon’s relentless drive to improve delivery speed led to a proliferation of physical warehouses around the country. Those warehouses became targets for state tax efforts. Amazon’s first instinct, naturally, was to fight back. It combined aggressive lobbying efforts with threats to relocate facilities (and thus jobs) to states that would agree not to tax. But over time it’s been a losing effort, and Amazon is now collecting taxes in several states and intelligently anticipates that more will join the cause. So Amazon now supports federal tax legislation as a way to simplify its logistics. A bit more cynically, a federal law should give it an advantage. Amazon is a company with a mission—deliver the best possible customer experience at the lowest possible price—and moving facilities away from key markets in order to avoid sales taxes complicates that mission. Other e-commerce sites with a different strategy still oppose the law. That’s why non-Amazon online retailers such as eBay and Overstock are leading the charge against the Amazon/big-box alliance.
The natural allies of eBay and Overstock are anti-tax Republicans, but with many GOP governors and lots of local retailers stridently in favor, this is proving to be one tax hike many Republicans can swallow. Conversely, liberal Ron Wyden of Oregon is very much in opposition since Oregon doesn’t have a sales tax. The bill’s prospects are less certain in the House, where Speaker John Boehner may keep it bottled up on general anti-tax principles. But the odds don’t seem bad. Between Amazon’s flip-flop, the $1 million exemption to benefit small online retailers, and the fact that every single member of Congress has brick-and-mortar retailers in his district, there’s a lot of clout behind taxing Internet sales. Even if it doesn’t pass the House this year, it’s hard to see the no-taxation coalition holding up in the long run. As a bonus, it even makes sense on the merits! E-commerce is great, but it shouldn’t just be a vehicle for tax evasion.