Senate Republicans will face a fork in the road this week when
Sen. Dick Durbin, D-Ill., forces a vote on a measure paving the way
for expanded state sales tax collection for online purchases. The
route Durbin would have them take would eventually lead to passage
of the so-called “Marketplace Fairness Act,” a bill that
dramatically expands state and local tax authority in order to help
bail out states like his native Illinois. The other avenue would
protect taxpayers from perhaps the scariest Internet predator:
government. A vote on Internet sales taxes during this week’s
budget process will tell us which path conservatives will
choose.
On the occasion of the first Senate budget resolution in more
than four years, Sen. Durbin is likely to introduce a “deficit
neutral reserve fund” amendment that is essentially a proxy for his
bill, S. 336. Despite what its supporters claim, this legislation
is bad news for conservative principles and limited government.
Though there are innumerable problems with the bill, there are
several that should be of particular concern to Senate
Republicans.
First, it countenances an enormous expansion in state tax
collection authority by wiping away a protection that shields
taxpayers from harassment by out-of-state collectors. The “physical
presence” standard dictates that a state can only require
businesses physically present within its borders to collect its
sales tax. This common-sense principle underpins virtually all of
American tax policy, but this legislation would eliminate that
protection for remote retail sales, allowing state tax collectors
to target businesses all across the country.
Though supporters claim that it would “level the playing field”
between brick-and-mortar and online retailers, the bill would in
fact do the exact opposite. Brick-and-mortar sales across the
country are governed by a simple rule that allows the business to
collect sales tax based on its physical location, not the home of
their buyer. Tourists making purchases in Washington, D.C.
establishments pay the district’s sales tax, not that of their
hometown back in Cheyenne or Memphis.
Meanwhile, online retailers would be denied that convenient
standard and would instead be forced to collect based on where
their innumerable customers live. This means quizzing purchasers
about their location, looking up the appropriate rules and
regulations in more than 9,600 taxing jurisdictions across the
country, and then collecting and remitting sales tax for that
distant authority. No brick-and-mortar shop has to do this for
in-store sales, and yet every online retailer would have to do it
for remote sales.
This much more burdensome collection standard would create
substantial interstate commerce burdens. Because they would now
have to comply with the complex sales taxes in thousands of
jurisdictions, online sellers would face serious collection and
compliance costs. In fact, the paltry $1 million “small seller
exception” in the bill (itself a good $29 million short of what the
Small Business Administration says a small business is) is an
explicit acknowledgment that it will impose significant costs and
that some should be spared the pain.
And while technology has advanced greatly since the Internet’s
infancy, we are no closer to having solved sales tax complexity
with software than we are to solving income tax complexity with
TurboTax. The challenge in tax compliance (of all sorts) comes not
in mustering the computing power to do the math, but in the
interpretation of a specific circumstance through endless rules and
regulations.
In seeking to address the failures of the existing tax systems
employed by states, S. 336 ends up giving federal blessing to a
massive expansion in state tax collection authority, the
dismantling of a vital taxpayer protection upon which virtually all
tax systems are based (the notion that physical presence is the
appropriate limit for state tax authority), all while harming a
sector of the economy, online sales, that still only accounts for
roughly $0.07 of every $1 in retail spending.
When Dick Durbin lays out his path this week, conservatives in
Congress should run, not walk, in the other direction.
