Old-style “bricks-and-mortar” retailers and a few brand-name dot-coms, instead of cost-conscious Internet consumers, seem to have the most influence with Rep. Jason Chaffetz (R-UT), sponsor of a bill introduced this week, the “Remote Transactions Parity Act.” The provocative legislation would largely end the tax-free status of much of the commerce done online, something we have managed to avoid since the mid-1990s debut of the commercial Internet.
The bill is being condemned by a coalition of free-market groups—including R Street, Americans for Tax Reform, Freedom Works, Heritage Action for America, and the Heartland Institute—in an open letter to Rep. Chaffetz, released yesterday.
But the National Retail Federation (NRF), the lobbyist for the country’s leading retailers, could not be more pleased.
The bill will provide “sales tax parity at the point-of-purchase, so that Main Street retailers do not face a competitive disadvantage, because they are required to collect the sales taxes owed on purchases, while remote and online sellers are not required to collect the tax,” said David French, senior vice president for government relations at the NRF in Washington, D.C., in a statement.
Chaffetz had been viewed as a promising, emerging conservative leader by some analysts on the Right, but this bill may lower their opinion of him. In reporting for this piece, we called and e-mailed Rep. Chaffetz to ask why he was onboard with a pro-tax measure, but he did not respond to our inquiries.
The U.S. Supreme Court weighed in on this issue years ago, so it is somewhat surprising that Chaffetz and Sen. Mike Enzi (R-WY) are pushing this measure. An earlier version of the bill has passed the Senate, but Rep. Bob Goodlatte (R-VA) and House Speaker John Boehner (R-OH) have so far blocked House authorization of Internet taxation.
It has been rumored, however, that both Amazon.com and Overstock.com, major online retailers, support this proposal, which would “remove compliance and audit burdens for remote sellers that choose to use certified software providers,” French said.
Local and regional retailers like the provisions of the bill eliminating “the online sales tax collection loophole which distorts competition, the free market, and unfairly favors online sellers at the disadvantage and expense of local communities, merchants, and small business owners and their employees,” French added.
But critics think the measure may go the way of the failed Marketplace Fairness Act, considered a predecessor of this bill, as it would dismantle proper limits on state tax collection authority and potentially damage electronic and interstate commerce, says Andrew Moylan, executive director of the R Street Institute, a pro-market think tank in Washington.
“Current law dictates that a state can only require a business to collect sales tax if it is physically present in that state,” said Moylan. “That precedent is the result of a Supreme Court decision grounded in a bedrock foundational principle of federalism: states must not be allowed to extend their tax and regulatory authorities beyond their borders.”
The bill also creates an uneven playing field between “brick-and-mortar” and “online” sales. Under the RTPA, only remote retailers would be required to determine their customers’ state of residence, quickly look up the regulations in close to 10,000 taxing jurisdictions, and then collect sales tax for a distant authority with which they have no “tangible connection.”
This is particularly unfair given that online retailers, unlike their brick-and mortar counterparts, do not benefit from local government services paid for with the taxes collected from them.
The bill does offer a “small seller exception” so eBay entrepreneurs and other micro-retailers whose businesses earn less than $1 million per year may have something of a safe harbor. But critics argue that the bill will harm Internet sales, which currently account for seven cents of every dollar spent on retail in the United States, out of a retail industry total of $2.6 trillion in sales last year. Free-market groups are working to preserve the geographical limits on taxing authority the Supreme Court affirmed in 1992 in Quill v. North Dakota.
“Imposing this unworkable collection standard on remote retail sales only, and subjecting online retailers to as many as 46 state tax audits in the process, would not only be unfair but would result in enormous complexity and damage to interstate commerce,” Moylan said.
(Kyle Maichle, a project manager for the Heartland Institute, contributed to this essay.)
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