The Alternative to the Speier-Womack Internet Tax Proposal

by on October 14, 2011 · 7 comments

Reps. Jackie Speier (D-Calif.) and Steve Womack (R-Ark.) have introducedThe Marketplace Equity Act,” which would open the floodgates to anything-goes State-based taxation of the Internet and interstate commerce. The bill essentially sacrifices constitutional fairness at the alter of “tax fairness.” Building on concerns raised by state and local officials as well as “bricks-and-mortar” retailers, Speier and Womack claim that, as “a matter of states’ rights” and “leveling the playing field,” Congress should bless state efforts to impose sales tax collection obligation on interstate (“remote”) companies.The measure would allow States to do so using one of three rate structures: (1) a single blended state/local rate; (2) a single maximum State rate; or (3) the actual local jurisdiction destination rate + the State rate (so long as the State “make(s) available adequate software to remote sellers that substantially eases the burden of collecting at multiple rates within the State.”)

This builds on a long-standing effort by some States to devise a multistate sales tax compact to collude and impose taxes on interstate transactions. In the Senate, Sen. Dick Durbin (D-IL) has floated legislation (“The Main Street Fairness Act”) that would bless such a state-based de facto national sales tax regime for the Internet.

There is a better way to achieve fairness without sacrificing tax competition or opening the doors to unjust, unconstitutional, and burdensome state-based taxation of interstate sales. In a new Mercatus Center essay,”The Internet, Sales Taxes, and Tax Competition,” Veronique de Rugy and I argue that:

Apart from getting chronic state overspending under control, a better solution to the states’ fiscal problems than a tax cartel that imposes burdensome tax collection obligations on outof-state vendors would be tax competition.  Congress should adopt an “origin-based” sourcing rule for any states seeking to impose sales tax collection obligations on interstate vendors. This rule would be in line with Constitutional protections for interstate commerce, allow for the continued growth of the digital economy, and ensure excessive, inefficient taxes do not burden companies and consumers.

Vero and I have detailed this alternative plan in much greater detail in this 2003 Cato white paper, “The Internet Tax Solution: Tax Competition, Not Tax Collusion.” As we explain in our new paper:

In this system, states would tax all sales inside their borders equally, regardless of the buyer’s residence or the ultimate location of consumption. Under that model, all sales would be “sourced” to the seller’s principal place of business and taxed accordingly. This is, after all, how sales taxes have traditionally worked. A Washington, DC, resident who buys a television in Virginia, for instance, is taxed at the origin of sale in Virginia regardless of whether he brings the television back into the District. Each day in America, there are millions of cross-border transactions that are taxed only at the origin of the sale; no questions are asked about where the buyer will consume the good. Policy makers should extend the same principle to crossborder sales involving mail order and the Internet. Under this approach, Internet shoppers would pay the sales tax of the state where the online retailer is based.

An origin-based sourcing rule has several advantages over the destination-based system States favor.

  1. It would eliminate constitutional concerns because only companies within a state or local government’s borders would be taxed.
  2. An origin-based system would do away with the need for prohibitively complex multistate collection arrangements because states
    would tax transactions at the source, not at the final point of consumption.
  3. An origin-based system also would protect buyers’ privacy rights, eliminating the need to collect any special or unique information about a buyer and to use third-party tax collectors to gather such information.
  4. It would also preserve local jurisdictional tax authority whereas a harmonization proposal would create a de facto national sales tax system that would exclude local governments.
  5. Finally, because it is more politically and constitutionally feasible, an origin tax may actually maximize the amount of tax
    collected for states by making compliance easier and incorporating currently untaxed activities.

In closing, it is important to address the misguided claim at the heart of the Speier-Womack bill that this is a “states’ rights” issue. Let’s be clear what real federalism is all about. Federalism is not about “states’ rights.” States have powers and responsibilities, and under the Constitution — at least the proper interpretation of it — they have wide-ranging flexibility to purse different governance approaches. But that power is not unlimited. America abandoned its first constitution, The Articles of Confedertion, after just 14 years in part because untrammeled state authority was discouraging interstate trade and commerce. In their wisdom, the authors or our present Constitution made sure to include Article 1, Sec. 8, Clause 3 — the so-called “Commerce Clause” — which created and protected what might best be thought of as the world’s first free trade zone – The United States of America. It remains one of the greatest achievements in constitutional and commercial history.

Thus, properly understood, federalism is about a healthy tension among competing units of government. Each has a different role and set of responsibilities, and this tension bolsters the checks and balances at the heart of our constitutional republic. [I outline all this in far more detail my 1999 book, The Delicate Balance: Federalism, Interstate Commerce and Economic Freedom in the Technological Age.]

In the context of Internet tax policy, this means that the tax power of the States can be legitimately constrained by the federal government to ensure that the interstate market is not unduly burdened with unjust levies. States certainly retain the power to impose whatever levies they wish on those actors who have a substantial physical presence in their geographic confines. That is, they can tax their own exports. Taxing imports from another State, however, is an entirely different matter, and one the necessarily requires some degree of federal oversight to ensure America’s free trade zone is preserved and protected.

An origin-based sourcing rule accomplishes that goal while also leaving States the discretion to impose taxes on their own exports if they so choose. The fact that this system would lead to heated tax competition among the States is a feature, not a bug.

  • http://www.techliberation.com Adam Thierer

    BTW, Steve DelBianco of NetChoice has a good write-up on what the bill means for smaller vendors:
    http://www.netchoice.org/the-taxman-doth-protest/

  • http://techliberation.com/author/berinszoka/ Berin Szoka

    Somehow, I seem to remember reading this post (or posts almost exactly like it) four or five times before!

  • http://www.techliberation.com Adam Thierer

    At least I’m still posting here. What’s your excuse?

  • Pingback: Tech at Night: Legislation: some good but mostly bad, FCC action: all bad, Patent Wars: getting silly

  • Sten Wilson

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    Technology today can calculate shipping costs in seconds for
    almost any location in the world. Ebay, Overstock and many others including
    NetChoice all maintain that multi-jurisdictional interstate sales tax
    calculation is too difficult, however all maintain vast computer
    infrastructures capable of keeping track of millions of global transactions
    including commissions, cost of goods, and even incredibly complicated Value
    Added Taxes, Provincial Taxes and many other taxes and fees across many
    different country borders. I assure you sales tax calculation, collection and
    remittance for online sales tax legally due is easily accomplished.

     

    The Main Street Fairness Act will assist many businesses of
    all sizes to realize unknown profits making them more competitive. The online
    component of my business is in its infancy. After examining possible avenues of
    growth I was immediately confronted by the tremendous burden of tax collection
    and remittance in my own state as well neighboring states. I said to myself, “there
    has to be a better way!” So I turned to the Internet.

     

    There is a simple solution: TaxCloud (http://taxcloud.net).

     

    The statements by large Internet merchants and others
    continue to confuse me. My company now utilizes a PayPal checkout button
    seamlessly integrated with TaxCloud.net. Now my business is enabled to
    calculate, collect and remit sales tax for any jurisdiction in any state. It is
    simpler in most cases for my business to calculate and remit sales tax than to
    deal with shipping. If my business can manage to collect legally due sales tax
    simplifying my customer’s lives, why is it so hard for Ebay, Overstock and
    their affiliates as NetChoice claims?

     

    Technology available freely on the Internet (like TaxCloud)
    is more than capable of seamlessly handling sales tax calculation and
    remittance. Sorry everyone, the “too burdensome” argument carried
    merit in 1967 and in 1992 (when SCOTUS last ruled on this matter), but in the
    era of modern computing where Ebay maintains a dominant position, multi-jurisdictional
    sales tax calculation and remittance is easily accomplished. TaxCloud
    accurately calculated sales tax for any jurisdiction for any state in less than
    13 MILLISECONDS!

     

    So what is the real reason Ebay and other companies choose
    to evade supporting our schools, hospitals, infrastructure, libraries, public
    parks and so much more by refusing to easily collect and remit sales tax
    legally due?

     

    It is clear that the real burden of sales tax falls upon the
    consumer, and there is no burden to business of any size. Any business can
    easily calculate, collect and remit sales tax legally due utilizing modern
    technology while simultaneously realizing greater efficiencies and profit.
    Consumers truly benefit by eliminating the burden of having to track and remit
    sales tax due on Internet purchases.

     

    The MSFA (Main Street Fairness Act) is proper legislation
    enabling states rights to collect sales tax legally due while maintaining
    states individual rights to tax independently. Remember the Boston Tea Party.
    Origin based sales tax fails to maintain state’s Constitutional autonomous
    taxing authority.

     

    Unrealized to most consumers are the true costs of
    permitting and embracing the illegal practice of tax evasion. This year
    Connecticut enacted the largest tax increase in it’s history. The increase
    included eliminating clothing exemptions, raising the sales tax rate %.35, %1
    on all luxury goods over $1000 and tax on alcohol went up %20. CT is not alone.
    West Virginia now taxes groceries to make up for lost sales tax revenues resulting
    from increasing convenience of online shopping. Rhode Island as well as
    doubled, that’s right a %100 increase, on all park entry and parking fees.
    Property taxes in states such as NY have increasing at an alarming rate to
    maintain funding primarily for education.

     

    Lower income wage earners are actually the hardest hit.
    Without the means and available credit to participate in online sales their
    only option is to shop locally paying increased sales tax rates, such as in CT,
    paying the tax bill for those who selfishly continue to evade their tax
    obligations. More interesting is the fact that for every million dollars in
    sales a brick and mortar company provides 3.8 jobs, while large online
    merchants provide only .8 jobs for the same amount of sales. Tax policies are
    not created or imposed to provide segregation of businesses. The passage of the
    MSFA will level the playing field benefitting many businesses and workers in
    every state.

     

    Sales tax is a fair and impartial tax billed directly to the
    consumer and in no way harms businesses when applied fairly and equally. Mall
    vacancy rates are now over %20 nationally and increasing as more brick and
    mortar stores continue to close their doors. As more stores close jobs are
    lost, homes are lost and…. you get the picture. The real burden is now upon
    the millions of small businesses who provide many more jobs and opportunities
    to find ways to compete with the large Internet retailers.

     

    The real burden today is upon the consumer and the many
    small to medium d businesses being consumed by misinformation. I discovered
    that by progressively employing modern technology my small start up business is
    now able to compete in any state without fear of nexus laws or affiliate
    relationships, and is more efficient and profitable. The Main Street Fairness
    Act will enable states rights to collect sales tax legally due providing much
    needed revenue, create and save many jobs, and most importantly permit states
    to eliminate other harmful taxing methods while simultaneously removing the
    many burdens confronting businesses today.

     

    I applaud Amazon for their Integrity publicly supporting the
    Main Street Fairness Act.

     

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  • http://www.codemonkeyramblings.com Mike T

    Tax competition is only a feature when it involves fundamental reforms to the tax code. Most of the time, it invites crony capitalism in the form of a state using its economic muscle to bend the tax code in ways that make other businesses pick up the tab to woo a big company to set up a presence in the state. I could easily see that happening here. A poor county in Arkansas says to Amazon “we’ll abolish all taxes on you AND split a 2% sales tax 50/50 with you.” If Amazon moved several key warehouses into its borders and took them up on that, the revenues from a 2% tax on a business that goes across the country would be an incredible incentive to abuse the tax code.

    I think the simplest solution would be for the states to create a common framework for helping them track the raw sales numbers for the use tax. For example, Amazon would report to Virginia’s tax authority “Mike T spent $XXXX.XX this year.” It wouldn’t even require the use of real SSNs; Amazon could hash my SSN, Virginia hashes it and the only report they get is:

    “Mike T, user ID #01b307acba4f54f55aafc33bb06bbbf6ca803e9a, spent $XXXX.XX”

    Personally, I pay my use tax to Virginia because I consider it a vote of confidence in how our state is managing its finances and as a strong states’ rights supporter, I would rather give our state less excuse to take federal money.

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