Consumers are buying more and more stuff from online retailers located out-of-state, and state and local governments aren’t happy about it. States argue that this trend has shrunk their brick and mortar sales tax base, causing them to lose out on tax revenues. (While consumers in most states are required by law to annually remit sales taxes for goods and services purchased out of state, few comply with this practically unenforceable rule).
CNET’s Declan McCullagh recently reported that a couple of U.S. Senators are pushing for a bill that would require many Internet retailers to collect sales taxes on behalf of states in which they have no “nexus” (physical presence).
In his latest Forbes.com column, “The Internet Tax Man Cometh,” Adam Thierer argues against this proposed legislation. He points out that while cutting spending should be the top priority of state governments, the dwindling brick and mortar tax base presents a legitimate public policy concern. However, Thierer suggests an alternative to “deputizing” Internet retailers as interstate sales tax collectors:
The best fix might be for states to clarify tax sourcing rules and implement an “origin-based” tax system. Traditional sales taxes are already imposed at the point of sale, or origin. If you buy a book in a Seattle bookstore, the local sales tax rate applies, regardless of where you “consume” it. Why not tax Net sales the same way? Under an origin-based sourcing rule, all sales would be sourced to the principal place of business for the seller and taxed accordingly.
Origin-based taxation is a superb idea, as my CEI colleague Jessica Melugin explained earlier this month in the San Jose Mercury News in an op-ed critiquing California’s proposed affiliate nexus tax:
An origin-based tax regime, based on the vendor’s principal place of business instead of the buyer’s location, will address the problems of the current system and avoid the drawbacks of California’s plan. This keeps politicians accountable to those they tax. Low-tax states will likely enjoy job creation as businesses locate there. An origin-based regime will free all retailers from the accounting burden of reporting to multiple jurisdictions. Buyers will vote with their wallets, “choosing” the tax rate when making decisions about where to shop online and will benefit from downward pressure on sales taxes. Finally, brick-and-mortar retailers would have the “even playing field” they seek.
Congress should exercise its authority over interstate commerce and produce legislation to fundamentally reform sales taxes to an origin-based regime. In the meantime, California legislators should resist the temptation to tax those beyond their borders. Might we suggest an awards show tax?
The Technology Liberation Front is the tech policy blog dedicated to keeping politicians' hands off the 'net and everything else related to technology.