Are Online Sales Taxes Only Fair?

The Marketplace Fairness Act imposes an unnecessary burden.

At a 2008 shareholders meeting, Amazon founder and CEO Jeff Bezos explained why he opposed requiring businesses like his to collect state and local taxes on their interstate sales. "We're not actually benefiting from any services that those states provide locally," Bezos said, "so it's not fair that we should be obligated to be their tax collection agent."

Last year Paul Misener, Amazon's vice president for global public policy, testified in favor of a bill allowing states to demand sales tax from online merchants, saying Congress should "level the playing field for all sellers." As that switcheroo suggests, there are plausible fairness arguments on both sides of this issue. And although there is a way to bridge the gap, it is not the route Congress seems intent on taking.

The Marketplace Fairness Act, which Congress is expected to approve soon, sounds like something out of an Ayn Rand novel. But it reflects understandable complaints from brick-and-mortar retailers who believe their online competitors have been enjoying an unfair advantage for way too long, thanks to Supreme Court rulings that bar a state from requiring a business to collect sales tax unless the company has a physical presence in that state.

Shoppers are still legally obligated to pay their state's sales tax on items they buy online, but few are aware of this notional requirement and even fewer comply with it. The upshot is that online sales are effectively tax-free, unless you happen to live in the same state where the merchant is located.

At the average combined state and local tax rate, the savings amount to about $9 on a $100 purchase. That's not a huge difference, but it helps online merchants (and hurts their offline competitors) to the extent that it makes people care less about shipping charges.

At the same time, companies with customers throughout the country are understandably worried about complying with the multifarious demands of the 9,000 or so jurisdictions that have the authority to impose sales taxes. That burden is less daunting to big companies like Amazon (which might even be said to enjoy an unfair advantage in that respect) than to their smaller competitors. In partial recognition of that reality, the Marketplace Fairness Act exempts merchants with less than $1 million in annual out-of-state revenue.

The bill seeks to reduce the compliance burden by requiring each state to offer free software allowing merchants to calculate sales tax and file a single return for all taxing authorities within the state. States could not audit a business more than once a year.

Still, that's 46 returns (45 states with sales taxes plus the District of Columbia), which have to be filed monthly or quarterly, and 46 potential audits every year, not to mention all the misunderstandings, disputes, and hassles that fall short of an audit. You can start to see why the Supreme Court deemed collection of sales taxes from remote vendors an unconstitutional burden on interstate commerce.

But the Court also said Congress, under its power to regulate interstate commerce, could authorize such tax collection, which is what it is poised to do. Unfortunately, it has overlooked a simpler, fairer, and smarter way of letting states get the revenue they crave.

In a 2011 paper published by the Mercatus Center at George Mason University, Veronique de Rugy and Adam Thierer recommended "an 'origin-based' sourcing rule for any states seeking to impose sales tax collection obligations on interstate vendors." Under that rule, which mirrors what happens when you buy something while visiting another state, each business collects sales tax on behalf of the state where it is based, no matter where the customer happens to be.

The beauty of this approach is that it treats all retailers equally, eliminates the daunting challenge of dealing with many different taxing authorities, and respects state policy choices while encouraging tax competition between jurisdictions. Evidently the idea makes too much sense for Congress to consider.  

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  • ||

    there are plausible fairness arguments on both sides of this issue.

    That's funny. The use of the word "fairness" in a bill's name is usually a guarantee it will provide anything but

  • $park¥||

    Apparently you just don't know what fairness really means.

  • Emily698||

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  • JW||

    That's not cricket.

  • grey||

    May I try? Fairness means theft and coercion. More fair, means a complicated system of theft and coercion.

    I don't agree with the conclusion on this article, a 'compromise' position of origin based. How about we leave them alone to do their business and we fight against all the other taxation and government "services"?

    The conclusions on Reason articles are sounding very NOT Libertarian.

  • Joao||

    It would be a sad day when Libertarians claim to have all the answers or that that philosophy is the end all.

    Life does get complicated. Government has its role.

    Maybe they could split the taxes, the origin state and the destination state. But who would collect it? Someone has to decide these things.

    It would, however, be better decided by folks who use "reason" as their yardstick.

  • Zeb||

    Well libertarian is not anarchist and even minarchy requires some sort of taxation. You have to collect those taxes somehow.

  • ||

    Getting the feds to drill business on behalf of the individual states for sales taxes where the business does not operate is a total crock of shit from any libertarian perspective, from a welfare-enabled minarchist state to an ancap free for all. Jeff Bezos had it exactly right in the first quote of this article.

  • grey||

    Intrusion into yet another area of commerce though?

  • Fist of Etiquette||

    States got their mind on your money and your money on their mind.

  • UnCivilServant||

    No tax is fair. If a government wants money, it can do what the rest of us have to - provide a product or service at a compeditive price. Now if you'd like to come to a mutually agreeable compromise between my position and the way things currently are, I'm open to negotiation.

  • grey||

    People than benefit most from the services of government need to pay their fair share. I'd propose we pass the Marketplace Fairness Tax, increase capital gains, and make income taxes more progressive. If you don't agree to all of these, you are not compromising, but obstructing.

    /libtard

  • Joao||

    The people who "benefit most from the services of government" are not those with taxable incomes. The poor pay nothing but clamor for their "fair share"

    The rich should start burning the money they can't spend just to show the poor that it is "theirs" and why would anyone covet what they can go out and get for themselves.

  • Tony||

    It provides services at a relatively reduced price thanks to economies of scale. You're welcome.

  • Sevo||

    Tony| 5.1.13 @ 10:14AM |#
    "It provides services at a relatively reduced price thanks to economies of scale"
    Cite missing, shithead.

  • Matrix||

    that's because his brain is missing, too

  • grey||

    Service I suppose would apply to things I didn't ask for, don't want, and don't benefit from. Direct utility always seems to be missing from these discussions, especially when you 'scale up' to supposed federal services.

  • Joao||

    Way too true.

  • SIV||

    Are the progtards up in arms yet over Walmart's pet legislation to fend off competition from predatory Mom n' Pop internet retailers?

  • grey||

    +1

    Interesting how in protecting the 'small business' the regulations somehow create an environment more suited to large corporatism.

  • Duke||

    There is no way that the overwhelming vast majority of voters want this tax. I wrote to one of the bill's sponsors to express that fact and why he should not vote for it. But congress is a law unto itself and could care less what regular people want since regular people don't fly to Washington and take them on golf trips and nice dinners and don't put up the millions needed to get elected. I want out of this crazy country.

  • ||

    With the exception of very few places, the first thing I notice upon leaving this country is the stink. The next thing I usually take note of is the corruption.

    You just think things are bad here.

    We would be better off fixing what we have than trying to find greener pastures, there just arent any.

  • Gordilocks||

    Canada, Australia, Iceland ....

    These places may have their own unique statist headaches, but without the police/surveillance state, a grotesque MIC, and a corrupt election financing system, plus all of the super-sized competing bureaucracies, these other locations can be quite a bit greener.

  • Monty Crisco||

    Dude, those places might seem benign, but do you know how many ways you can get arrested and fined in Canada for just exercising what we call FREE SPEECH?!?!? Seriously, CARTOON PORN can get you a jail sentence there! Sam Kinison would have been a lifer in that country...

  • LynchPin1477||

    If you think Canada is free from corruption, read the headlines of any Montreal newspaper from the last year. I can't speak for other cities/provinces.

  • ||

    Here's the thing. In America you began with the notion of individual liberty and have been fighting to preserve it ever since. There's no such thing in Canada. We STARTED off as property of the state and continue as such. Yeah, we may have been freer and perhaps more than we think but since 1945 this place has no liberty impulse.

    We have no national discussions on liberty. Whenever we talk about things - say the evil Bill 14 in Quebec - it's always about the collective and never the individual. That's because Canada has no real heritage on the subject. We have no literature on it, and we don't debate it in our national discourse.

    So you're fucked right there. You come to Canada you belong to the STATE.

    And don't get me going on the fact that free-speech is not a means to an end but merely a guide for our political masters. They will crush it if need be. Corruption? Quebec is just about as bad as they come.

    Nah. I say stay and fight the good fight.

    There's nothing up here but mediocrity and incessant navel-gazing. It's mind-numbingly boring.

  • ||

    I should add that the free-market Montreal Economic Institute (which I reckon libertarians would be comfortable with) argues that Canada once upon a time before the 1920s was about as free as the USA if not more so. It's when we began importing socialist ideas and doctrines, ironically, from the USA we began to make the transition to social-democracy.

    You should read up on the state of anarchy in public health.

    So my assertion there's "no literature" should be amended to "some." We have the MEI, we have Fraser, CD Howe, and Le Quebecois Libre at least offering Canadians a different point of view with sprinkles of professors and commentators here and there who only get ridiculed.

    Put it to you another way, if Canadians read Reason or some of its writers went on, say, the CBC to debate, they may as well be aliens to that audience.

    It's why I come here.

  • Zeb||

    I listen to As It Happens fairly regularly and I have noticed that the hosts do often seem confused by the American idea of free speech in a way that seems really strangely un-self aware to me. But sadly, I run into a lot of Americans with the same problem.

  • ||

    Zeb, haven't listened to 'As it happens' in years. In fact, I've pretty much stopped listening to CBC. At some point the "look at those crazy Americans at least we're not them because we're smarter and more sophisticated" shtick wears thin.

    They ARE unaware - or worse indifferent - to the fact what they see unfolding in the USA is a battle between liberty and tyranny. People believe that fight is over.

    It's not.

    The big problem up here is when you begin to speak about libertarianism they look at you and say "what? you want to be like Americans? Don't make me laugh!"

    Without ever actually pondering the issue. We just accept our "way" as an article of faith and success.

  • Gordilocks||

    When I said Canada and the other places were 'free-er',
    it was in the context of the qualifiers.

    Yes, Canada has serious collectivist impulses, a problem with absolute free speech (fuck you, Human 'Rights' Commissions) and some other statist programs. We have little history of enshrining individual rights.

    Due to our smaller population, less provinces, and smaller federal government, I think the argument can be made that in certain respects, freedom is a little less under threat here; if only because of the smaller state, and reduced likelihood of being bothered.

    Pardon the lack of clarity on that.

  • Matrix||

    Under that rule, which mirrors what happens when you buy something while visiting another state, each business collects sales tax on behalf of the state where it is based, no matter where the customer happens to be.

    This is how it SHOULD be handled, but thinking clearly and rationally was never something that pols were proficient in.

    But some online retailers, such as Amazon, have sites around the country. Which state would the sales taxes be collected to? Perhaps the one from the distribution centers from where your purchases are being shipped? What about people in the state? In many places, a bigger percentage of sales tax is imposed by the local government. Who gets the money? The city from where it was shipped or the city to where it is shipped?

    You might also see several retailers spring up in states with no sales taxes to avoid these taxes.

  • crashland||

    What about the location of the servers? Since that is where the transaction is actually processed... Oh, what happens if the "server" is in the "cloud" and the physical server processing the transaction could be one of many located in different data centers in different states or even outside of the country?

    What if it is a drop ship business that sends the order to another company that then fulfills the order from one of X number of different distribution centers?

    If Congress's goal is to stifle innovation and shit on small businesses, this effort will certainly further that goal.

    Maybe form a corporation in another country and form one in a no sales tax state, the foreign corporation takes the order and sends it off to the domestic corp for fulfillment... Can congress force foreign entities to collect taxes for the states?

  • Zeb||

    It is my understanding that if a company has physical presence in a state with sales tax, the company must collect taxes for that state on any orders delivered to that state.

  • VG Zaytsev||

    Under that rule, which mirrors what happens when you buy something while visiting another state, each business collects sales tax on behalf of the state where it is based, no matter where the customer happens to be.

    This is how it SHOULD be handled, but thinking clearly and rationally was never something that pols were proficient in.

    And the current paradigm, where sales shipped out of state are not subject to state's sales tax are entirely the result of those state's tax policies and could be changed at any time.

  • Matrix||

    You're right. They could probably change those laws. I can see it now... Congress passes this law, so the businesses start collecting taxes to the buyer's state/city. Then the states where the businesses are located change their tax structure to require those businesses to collect sales taxes on all purchases. That could make out-of-state buyers pay double sales taxes.

    MASSIVE REVENUE INCREASE! And, as we know from Krugnuts, more revenue from the government will HELP THE ECONOMY! It's a win for EVERYBODY!

  • grey||

    I feel like we've already capitulated the ethical position of their demands, as if a compromise is somehow in order.

    It's not as if these on-line companies are going tax free simply because thetre isn't a sales tax, they still pay real estate taxes on distribution centers, call centers, corporate offices. Not to mention all the related employment taxes, as well as federal income taxes, the layers of fees on energy, yada yada, I grew tired of keeping track. If something is moving, they want to tax it. This is just something new that is moving, they've identified it, and now want to tax it. The shipping companies have their own regulatory and tax burdens that with the failing post office I'm sure will get worse.

    The only unfairness is the broad spectrum of other taxes everyone is paying. I'm taking the position that the only ethical thing to do is resist all the ideas of 'equalizing' and focus on rolling back other taxation and size of government.

  • wonk||

    If I don't pay sales taxes on an Amazon purchase, the taxes I am indirectly paying are: Amazon warehouse property tax, UPS/FedEx facilities' property tax, UPS' fuel tax, UPS' vehicle taxes / fees, etc. If I were to pay sales tax, I would still pay all of those other taxes. I don't see how "there are plausible fairness arguments on both sides of this issue."

  • Lord Peter Wimsey||

    Correct. There are not "plausible fairness arguments" for theft. This is really stupid phrase that has no business in a libertarian article.

  • grey||

    You stated first and more succinctly what I was thinking.

  • megamucho||

    Unless you are buying something made in-shop, you are paying these warehousing and distribution "indirect taxes" on a purchase at the brick and mortar store as well. So the difference is still the local/state sales taxes which aren't collected in the online transaction.

    Not that I am at all in favor of any new tax... But implying that online somehow already pays more in tax than physical is not entirely true.

  • Joao||

    Just stating the facts. That's OK.

  • Gilbert Martin||

    "Which state would the sales taxes be collected to? Perhaps the one from the distribution centers from where your purchases are being shipped?"

    Well that would be point of origion for the mechandise the customer is getting.

    Every state, county and city would want as many distribution centers in their jurisdiction as possible with origin based taxation. They would get the revenue windfall from customers who don't live in their state and to whom they provide no services that sales taxes are supposedly funding.

    And of course there would be a rush to set up distribution centers on those few states that dont' have any sales taxes - and a rush for customers to seek the companies out that have those distribution centers and buy from them.

  • Matrix||

    I know. Which is why I pointed it out. But are those states strategically placed around the country? I mean, if they are all in the midwest, it would lead to longer shipping times for people living in, say, Washington, Florida, or Maine.

  • Rasilio||

    http://taxes.about.com/od/stat.....es-Tax.htm

    There's 4 of them, NH, Delaware, Montana, and Oregon.

    Realistically between NH and Delaware you could realistically cover about a quarter of the countries population getting everything along the Boston - Washington corridor.

    With Oregon you could get as far south as San Jose and all the way up to Seattle by putting distribution centers at the north and south ends of I5 in the state. Montana would not be terribly useful for just avoiding sales taxes since it is not really close to any large cities.

  • DaveSs||

    The idea that the states will be able to provide free software to collect the tax that actually works with hundreds of different e-commerce systems is absurd.

  • itsnotmeitsyou||

    These are the same types of people that think that building the exchanges for Obummercare would be easy.

    They are horribly ignorant of how anything with a circuit board works that they just go all "Gene Roddenberry" on the subject.

    Well, you can just [tech] the [tech] and then use the [tech] to [tech]

    See, it's easy when you don't actually have to understand what tech means.

  • derpules||

    I'm in the process of building an interface to the federally facilitated exchanges....it's a mess, more than you know.

  • WomSom||

    I think its pretty pathetic myself.

    www.GoGetAnon.tk

  • SugarFree||

    Tulpa wants you to pay a tax on online purchases. Because "fairness." Which is just the libral/utilitarian version of "Fuck you, that's why."

    Pro-cop, pro-tax, pro-gun-control, anti-food-truck
    Tulpa: Wrong for Hit & Run. Wrong For America.

    Ad paid for by the Committee to Increase Passive-Aggressive White Space

    No animals were harmed in the production of this post.

  • VG Zaytsev||

    Racist.

  • SugarFree||

    White Space

    This is pulled from something Tulpa said, but they deleted it from that thread. Along with a lot of other stuff.

  • ||

    I just thought you were referring to the white space left behind by reasonable-blocked commenters.

  • ||

    too many words. I only understand pictures

  • JW||

    You had me at 'wrong.'

  • ||

    "No animals were harmed in the production of this post."

    And I would like to know why not.

  • ||

    Tulpa counts as an animal. Can we harm him?

  • SugarFree||

    Read these comments quick before they get deleted.

  • Restoras||

    Threadjack:
    The Littlest Fascist stands on another grave, ready to shred Bill of Rights in the name of Safety.

  • JW||

    If this were a sane and just world, people would be protesting this little fuck trying to insult their intelligence, and gathering the torches and pitchforks.

    But, most people are easily frightened morons, so that's right out.

  • ||

    "Bloomberg accused mayoral hopefuls of putting concerns about police stop-and-frisk tactics ahead of children’s lives."

    Do I understand this correctly? The blatantly illegal stop and frisk program was being implemented when Alphonza Bryant was murdered?

    Isnt there a saying.....something about trading liberty for security ? I cant remember how it goes.

    Bloomburg truly is a parody of the liberal fascist.

  • Rights-Minimalist Autocrat||

    "Trading liberty for security is a great idea!" -- Michael Bloomberg

  • Rich||

    If the goal is "to level the playing field", why not eliminate sales taxes across the board?

  • Question of Auban||

    What if I buy something using an online-only currency such as Bitcoin or Freicoin? How would the taxes (if any) be calculated? Could this be a loophole that Bitcoin fans will actually benefit by?

  • Rasilio||

    The bigger question is how this would apply to companies based in places like Puerto Rico or even Mexico.

    I mean if your business is not able to have regional distribution centers and already has to ship around the country what is to prevent you from just moving the business outside of the country to avoid having to deal with the sales taxes.
    Puerto Rico would be better since it would mean not even having to deal with customs but depending on the language in the law may or may not get you out of having to collect the sales taxes but even if that didn't work yu could just move to Nogales or someplace similar

  • Tony||

    It's hard to argue that government should treat online retailers favorably compared to brick-and-mortar ones, which is what exempting them from sales tax collection does (that is, it's government picking favorites).

    The good thing about the bill is that it requires states that collect sales taxes to simplify their tax systems (using one of a couple of options) before they are authorized to collect the online sales taxes.

  • Gilbert Martin||

    "It's hard to argue that government should treat online retailers favorably compared to brick-and-mortar ones"

    Indeed so.

    That's a good reason for all sales taxes to be repealed throughout the entire country. Then all retailers WOULD be treated equally: none of them would be an unpaid tax collector for the government.

  • Tony||

    That would be true, but then we'd have a couple of problems: the feds making blanket revenue generation policy for states, and states having to make up the difference with income taxes or something.

  • DaveSs||

    Who said anything about the Feds making blanket policies? I didn't see any suggestion that the Fed prohibit state/local sales taxes.

  • Sevo||

    DaveSs| 5.1.13 @ 10:29AM |#
    "Who said anything about the Feds making blanket policies?"

    Shithead is incapable of posting without beating on that strawman he drags around.

  • Gilbert Martin||

    The proper solution to all of it is to have both the feds and states charge out it's services on a user fee basis.

    Of course things like food stamps would have to go the way of the dodo bird, since that's not an actual service but merely stealing some people's property to hand out to other people.

    And that would be fine with me.

  • DaveSs||

    Sales Tax Compliance costs for an online business will be many times more than compliance costs for a fixed location local business are.

  • ant1sthenes||

    It's still pretty shitty, since it essentially imposes an interstate system of taxation without representation.

  • GregMax||

    Population stress - too little product of value for the number of people who want shit.
    This is only headed in one direction - economic deep-shit.

    I'll just buy less and select slow but cheap shipping more often. The actual buying power of average income earners is dropping in "inflation" adjusted terms. How do they think that adding more costs to commerce will make things better for anyone but the parasites in government?

    Hunker down . . .

  • My Dog Bites Better Than Yours||

    Giving out-of-state sellers an advantage should be an incentive for the states to keep the sales tax low.

    I know, I know. That's just crazy talk!

  • Nicholas D. Rosen||

    I like that idea. It gives states an incentive to cut the sales tax, which could be done by less spending (yay!), by higher income and other taxes (not so good), or by taxing land values, which I consider good. No one creates the land by his own efforts, and its economic value is due partly to government services, and partly to the general presence of society. Land values, not sales or earned incomes, should be taxed.

  • Sesde||

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  • Tom Beebe||

    PLEASE DELETE THESE ADS FOR WORK FROM HOME SCHEMES!

  • Tom Beebe||

    I oppose sales taxes, period! Why? Well, nobody seems to complain when handed a sales slip that's just a few cents above the agreed-upon price. Stealth theft strikes again. We tolerate these taxes because they are in such small increments. Much like the boiling frogs concept. We will never reform our government until its true costs are obvious to all. Like taxes "on businesses" which are paid for as part of the price of what we consume (where else does a business get the money to pay taxes but from you, the consumer), sales taxes support oversize government spending. Consider them death by a thousand cuts.

  • MisterDamage||

    "Evidently the idea makes too much sense for Congress to consider."

    Well, duh. This would cause online retailers to flee states that impose burdensome sales tax rates. Can't have the market deciding these things.

  • gphx||

    It seems to me if the US starts requiring US based retailers to collect taxes based upon the state the purchaser lives in a retailer would be able to offer their goods effectively 10% cheaper if they move their headquarters a mile across the border into Canada. If this law is passed we could see lots of the largest retailers offshoring. The bill is the NAFTA of the internet.

  • LightsOnGraphics.com||

    98% agree, but I have a different approach for execution. Since it crosses state line, make it a federal sales tax... but read my article to understand why.
    http://blog.lightsongraphics.c.....-idea.html

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