Senate Poised to Pass Internet Sales Tax Bill, Kill Healthy Competition

Yesterday, the Senate voted overwhelmingly to allow a vote on The Marketplace Fairness Act, which would allow states to start forcing online retailers with no physical presence in their states to collect sales tax. The vote will happen this week and the bill will likely pass the upper chamber. Estimates suggest some $11 billion is currently escaping the clutches of state and local tax collectors, so we're talking about real cash here.

As the indispensable Declan McCullagh of CNET reports, this effort caps

years of lobbying by the National Retail Federation and the Retail Industry Leaders Association, which represent big box stores including including Walmart, Target, AutoZone, Best Buy, Home Depot, OfficeMax, Macy's, and the Container Store. President Obama also supports the bill, his spokesman said Monday.

As telling, McCullagh notes that the current legislation—which would force all online retailers to comply with variations among the nearly 10,000 tax jurisdictions in the country—is totally different from earlier attempts to apply simplified taxes to online sales.

Eight years ago, Sens. Mike Enzi, R-Wyo., and Byron Dorgan, D-N.D., introduced legislation that would have allowed Internet sales taxes to be collected—but only after states simplified and standardized their tax systems through a process created in 2000. Enzi said at the time that it was necessary to require "dramatic simplification in almost every aspect of sales and use tax collection and administration" including "a reduced number of sales tax rates" and "reduced audit burdens for sellers."

The current version of S.743, however, lacks those protections. Small sellers with no profits could be subject to audits in dozens of states. Each of the nearly 10,000 local tax jurisdictions could specify a different tax rate. Businesses would also have to figure out how to handle the complexity of integrating as many as 46 state government-supplied software packages into Web ordering systems.

Enzi is in favor of the new bill, as is Amazon (which has already cut deals with various states in which it has a physical presence). The sense is that the massive online retailer can easily handle administrative costs that are a burden to smaller comptetitors.

Apparent from the current bill's lack of simplification, there is a superficial case for treating retailers similarly. Though let's not skip over the maze of state and local anomalies. As McCullagh notes,

In New Jersey, for instance, bottled water and cookies are exempt from sales tax, but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but a mink fur coat is not.

But beyond the superficial case for "equal" treatment, there are real questions about fairness. Back in 2009, Overstock CEO Patrick Byrne talked about this with Reason TV. Internet retailers, he argued, "put a lot lesser load on a local infrastructure than it does to build a Target." That includes not only roads and sewers, but also schools and other buildings that serve employees' kids and the like. And we might add that just as online retailers gain an edge by not charging sales tax, bricks-and-mortars retailers have the edge in immediacy, display space, and other things customers like. Best Buy and Borders (which screwed up its web store for years) didn't come close to going belly up simply because everybody started buying shit online (though such competition was a factor).

Reason columnist Veronique de Rugy and her Mercatus Center colleague Adam Thierer have also noted that The Marketplace Fairness Act is premised on the idea that "the the government should be able to collect the maximum amount of tax revenue from citizens, and that consumers should not be able to decide where to shop based on tax levels." They actually present a different way of thinking about the sales tax issue that deserves more attention.

Tax competition is a good and healthy thing, as it helps to spur innovation in both the public and private sectors and enhances various "experiments in living" different jurisdictions and communities want to pursue. Residents benefit from being able to choose among different attitudes toward the level of taxation and (one presumes) the level of public services they pay for.

De Rugy and Thierer suggest that taxing goods and services at the point of origin rather than the point of definition is an easy way to keep tax competition thriving. Instead of taxing online sales based on where the customer lives, tax the purchase where the vendor is. That would not only simplify the vendor's calculations (he/she would only need to know one tax code), it would allow for exactly the sort of competition that helped create differential jurisdictions in the past that helped nurture catalog sales and online retail.

The good news for those opposed to the Senate plan? The House is unlikely to pass similar legislation.

Watch Patrick Byrne (who holds a Stanford Ph.D. in philosophy) talk taxes, short-selling, and Robert Nozick: