The Internet, in the popular imagination, is supposed to be free—“the last bastion of our economy untouched by the government,” as they say on Fox News. But you don’t have to be a right-winger to recoil at the idea of an Internet sales tax. People who shop online have always gotten a free ride. When you buy a $1,000 TV from a physical retailer, you’ll pay $50 or $100 in additional taxes to your state and city. When you buy the same TV through an online store that isn’t based in your state, you’ll pay just the $1,000 base price. Many states require you to pay that extra sales tax on your tax return, but who does that? Nobody, that’s who. The net effect is that shopping online earns you a big, permanent discount. If you’re buying anything big, it almost always makes sense to avoid physical stores.
At least, it did until recently. During the last two years, Amazon, which had long led the charge against efforts to collect sales tax on online purchases, suddenly began striking tax deals with states. This was a strategic capitulation—by agreeing to collect taxes, Amazon can now build huge warehouses across the country. (It had previously avoided setting up warehouses in many states in an effort to avoid creating a “tax nexus.”) The warehouses allow Amazon to significantly increase its shipping speed, approaching same-day shipping in many areas. Brilliantly, Amazon has turned the tax issue into an advantage.
Amazon’s reversal led the way for a national Internet sales tax plan. That’s how we got to the Marketplace Fairness Act, which seems likely to pass the Senate next week (there are also encouraging signs in the House). If the bill does pass, a state like Illinois, which loses an estimated $169 million a year in tax to Internet sales, would be able to force out-of-state retailers (e.g., the Washington-based Amazon) to collect sales tax from any Illinois resident. In other words, your free ride would end—no more tax-free stuff from Amazon. If the Fairness Act passes, and if you live in a state that collects sales taxes—45 of them do, plus Washington, D.C.—that state could choose to require you to pay that tax on all purchases, both offline and online.
But don’t hate this bill just because you’ll end up paying more. The Marketplace Fairness Act does something that’s almost unheard of: It makes taxes fairer and simpler. There’s also a carve-out for small businesses—any online company with less than $1 million in annual revenue will be exempt from the law. Rather than unrealistically requiring us to track of our purchases so we can pay our sales tax at the end of the year, it puts the onus on states to simplify their tax regulations. (More on that later.) The law will thus create a centralized tax-collection system that proponents say will allow states and cities to receive $23 billion more in revenue each year—taxes which they’re already owed, but aren’t currently collecting. (Opponents dispute the figure, saying that Internet sales lead to only about $3 billion in uncollected state and local sales taxes.)
Amazon supports the bill. So do many small businesses and large retailers, which have long been on the losing end of the tax fight. The only holdouts are medium-sized business that primarily sell online—companies that make more than $1 million a year, but aren’t large enough to set up a network of warehouses to provide same-day shipping—and the large companies that support those businesses, primarily eBay. (It wants the bill to exempt businesses that make $10 million rather than $1 million.)
The other major opponents are conservatives who see the bill as a tax increase. “Less money in the pockets of people, more money for big government,” says the Heritage Foundation, which has vowed to mark down lawmakers who vote for the bill. Americans for Tax Reform, Grover Norquist’s group, has also predictably lined up against the act. Norquist told Newsmax that the law would allow states to “abuse” their tax powers. “When a state is crazy and has sales taxes that go too high, people will travel to a different state and buy something, they’ll buy online or through catalogs,’’ he said. “That competition keeps states from being too abusive to citizens in their state. This law, if it were to pass … would allow Alabama politicians to reach into New York and tax New York businesses.”
That’s plain nonsense. For one thing, the Fairness Act does not impose a new tax. Sales tax isn’t a tax on businesses—it’s a tax on customers, with the business merely acting as the collector. Whether you buy something online or offline, you’re supposed to pay tax. It’s just that, as of right now, the online merchant isn’t required to collect the tax you owe; it’s your job to pay the tax by yourself.
That’s what the Fairness Act fixes. Instead of imposing a new tax, this bill addresses a tax-evasion scheme. If you want to argue that states should abolish or lower sales taxes on all businesses, both offline and online, that’s fine. But none of the critics are pushing for cutting sales taxes for everyone—in fact, conservatives generally see sales taxes as preferable to income taxes. Instead, by opposing this bill, they’re merely arguing for an unequal policy—that some businesses should collect sales taxes and other should not.
This isn’t just unfair. It’s also terrible policy. What rational reason is there for governments to favor online businesses over offline ones? In the early days of the Web, one popular argument was that online businesses needed a helping hand. The Web was a major area of innovation, so it made sense to give it a temporary break from regulation. That argument no longer applies. Now most people think offline businesses are the ones that need a helping hand, with some in Silicon Valley arguing that the vast majority of offline businesses are destined for failure. That’s debatable, but it’s hard to argue that the Internet still needs help. Online businesses enjoy so many advantages over offline ones—increased selection, lower overhead, a less annoying shopping experience—that it’s laughable to give them a special tax break, too.
What about Norquist’s charge that the bill would allow states to tax businesses beyond their borders—that it would let lawmakers in Alabama loot companies in New York? That’s so stupid it’s hard to believe Norquist believes it himself. Once again, sales taxes are imposed on customers, not businesses. So if lawmakers in Alabama raise the sales tax, they’re raising it on their own citizens—not on businesses in New York. Norquist is right that this bill does prevent Alabamians from easily escaping their state’s sales tax by shopping from out-of-state companies. Another way of saying that: It makes tax evasion more difficult. But if you favor lower taxes, this is not necessarily a bad thing. Without the Fairness Act, a state’s residents have little incentive to push their lawmakers to decrease their sales taxes—every time your state raises the rates, you can just shift more of your purchases online. By forcing everyone to pay taxes, wherever they shop, this gives more people a stake in the tax rate debate. If, after the Fairness Act passes, Alabama decides to hike its sales tax, even online shoppers will have an incentive to fight the increase.
The only halfway rational reason to oppose the idea of collecting sales tax on online purchases is that it’s too complicated. A physical business has to keep track of the tax rate in each place it has a store. Online businesses, meanwhile, must tax each customer at her local rate. There are about 9,600 different tax jurisdictions in the United States, according to the Tax Foundation. “How can we possibly know the tax rates in [each of these] jurisdictions?” Overstock.com CEO Patrick Byrne once argued in an interview with Reason TV. “In one jurisdiction, cotton candy is food; in another it’s entertainment or candy.”
I’m not sure how they do it at Overstock, but most companies that track lots of information use a piece of software known as a database. Given that Overstock’s site advertises 81,381 “home décor” items, including 60,309 area rugs, 3,907 window treatments, and 31 decorative swords, I’m fairly confident they’ve heard of such a thing.
But lucky for Overstock, the Fairness Act doesn’t require anything so complicated. That’s because the legislation has an important caveat—in order to begin requiring tax collection, a state first needs to simplify its tax policies. Among other things, states would have to create a single agency to deal with all regulatory filings from out-of-state retailers, and they’d have to provide free software that allows retailers to easily comply with the state’s many tax jurisdictions. What’s more, there are several existing services that, for a small fee, help companies comply with tax collection. These services plug into the shopping and accounting software that many large businesses already use; collecting and paying every tax jurisdiction at its proper rate, then, is just a matter of pressing a button. (And remember, the bill wouldn’t apply to small online businesses, so they won’t get hit with any extra compliance cost.)
Conservatives have been railing against our too-complicated tax system forever. Here, finally, is a bill that actually makes taxes simpler. Unless you support tax evasion, then, there is no sane reason to oppose making online shoppers pay their fair share.