The Senate is currently debating the Marketplace Fairness Act, a law that would make it easier for states to collect online sales tax. Right now, if an Internet seller has no physical presence in the buyer’s state, he doesn’t have to collect tax on the sale. The buyer is legally obligated to report the sale himself and pay “use tax,” usually by disclosing the sale on his state income tax form.
Most people don’t do this. (Be honest: Do you?) So taxes go uncollected.
Under the proposed law, sellers would be required to remit the tax so long as states take certain steps to harmonize their sales taxes and reduce the cost of compliance. This would bring the practices of pure online retailers, such as Amazon, in line with sites such as Walmart.com. Because Wal-Mart has actual stores in every state, it is required to collect sales tax on every transaction.
Senator Ron Wyden of Oregon, a Democrat and leader on tax reform who will probably be chairman of the Senate Finance Committee in the next Congress, has some thoughts on this bill. He notes that this change could lead to states collecting $22 billion in annual taxes that are currently going uncollected. He also points out that it would improve the sustainability of the sales tax as a revenue source, possibly encouraging states to rely on it more.
These are good arguments for the law. So why does Wyden cite them in opposition to it?
“Collecting sales and use taxes for goods or services that were acquired in another state has long been a low priority for state and local governments,” Wyden says. This isn’t quite right: States do make efforts to collect use tax on large out-of-state purchases, particularly cars. But it is true that states generally do not go after smaller purchases because there is no good way to track them, and the need for buyers to actually leave the state to shop traditionally discouraged tax avoidance.
The rise of e-commerce has changed this situation in two ways. One is that it has become much easier to buy stuff from merchants located outside your state. The other is that it has become easier for those merchants to charge you the tax. If a store in New Hampshire sells a TV to someone from Massachusetts, it doesn’t necessarily know the buyer is going to put the TV in his car and take it back to Massachusetts. If an online store based in New Hampshire sells a TV to someone from Massachusetts, it knows exactly where it is shipping that TV.
So this tax-avoidance problem is getting worse -- but it’s also getting easier to fix. Why doesn’t Wyden want a fix that will help make the consumption-tax base more comprehensive and therefore more efficient? It probably has to do with the fact that Oregon doesn’t have a sales tax.
You can see this from a bipartisan letter that Wyden signed in opposition to the Marketplace Fairness Act. The letter is notable for two reasons. One is that it mischaracterizes Quill Corp. vs. North Dakota, a 1992 Supreme Court decision on the taxation of out-of-state sales. Citing the decision, the letter says requiring sellers to remit out-of-state sales tax “would place an unconstitutional burden on interstate commerce.”
In fact, the decision found that such a requirement was not authorized by federal law; only in the absence of such federal authorization are state efforts to collect tax from out-of-state vendors unconstitutional. “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes,” the decision states. This is what the Marketplace Fairness Act would do.
The other notable fact about the letter is which seven senators signed it. Three are Tea Party Republicans: Marco Rubio of Florida, Ted Cruz of Texas and Mike Lee of Utah. These are exactly the sort of politicians you would expect to be sympathetic to the “starve the beast” arguments against the Marketplace Fairness Act that I critiqued last fall. The other four, three Democrats and a Republican, represent states with no sales tax, and therefore no revenue to gain from improved collection.
Oregon is perfectly free to choose not to have a sales tax. The sales tax has significant drawbacks and, with a sufficiently robust system of income and property taxes, a state can go without one. But for most states, the sales tax is an important source of revenue, and as such it should be efficient and collectible so that government services can be financed.
Wyden warns that improved sales-tax collection might encourage states to raise their sales-tax rates. This runs contrary to observed experience. Over the last four decades, the sales-tax base has been shrinking, mostly because consumer spending has been shifting from taxed goods toward untaxed services, but also in part because of e-commerce. Sales-tax receipts have not declined; instead, governments have raised sales-tax rates just enough to offset the shrinking of the base.
Since the 1970s, mean state sales-tax rates have risen from 3.5 percent to 5.6 percent, but collections are flat as a share of the economy. Since the Marketplace Fairness Act will combat the shrinking of the sales-tax base, it will take off the pressure on state governments to raise tax rates.
The best arguments against the Marketplace Fairness Act relate to compliance costs, and Wyden raises these arguments too. There are more than 8,000 jurisdictions in the U.S. that levy a sales tax, and identifying the correct tax for each customer can be complicated. But retailers (and programmers) are already rising to this challenge. If I have one store in New York, I am already obligated to collect tax on remote sales to customers in any city or county in the state, meaning I must follow sales tax for many jurisdictions beyond the one in which my store is located.
The Marketplace Fairness Act includes various measures to reduce the burden of this compliance. It aligns with guidelines I laid out last year on striking a balance between collecting taxes and holding down compliance costs. If Wyden really wants to highlight the law's flaws, he should focus his efforts on further reducing compliance costs. It's a better argument than pointing out that the law would allow states to more efficiently collect the taxes they are owed.
(Josh Barro is lead writer for the Ticker. Follow him on Twitter.)