Business Ethos Blog

The Rush to Tax Online Sales

Dr. David Mielke, Retired Dean, College of Business at Eastern Michigan University


Dr. David MielkeThe U.S. Senate is expected to vote as early as this week on legislation allowing states to require Internet retailers to collect sales taxes.  Every time Congress has taken a serious look at proposals to boost internet sales taxes, it has rejected them.   That may be the reason that pro-tax Senators are trying to rush through an online tax hike with as little consideration as possible.  The usual argument is that charging sales taxes on internet sales will level the playing field for brick and mortar stores which are required to collect sales taxes.  In addition, states claim they are losing millions in sales tax revenues at a time the revenues are badly needed.  But is this the “Right Thing to do?”  Should Congress pass a law to require the collection of sales taxes on internet sales?

Let’s look at some issues:

1. In a 1992 U.S. Supreme Court decision, Quill vs. North Dakota, the court ruled that businesses do not have to collect and remit sales taxes to jurisdictions where they have no physical presence because it was too big a burden.  Though the ruling applied to catalogs in the pre-internet age, it established an important principle of cross border tax accountability.  Congress does have the power to write new rules for interstate commerce.  But for years even politicians who wanted to force remote sellers to collect taxes conceded that it would only work if states and localities dramatically simplified their tax systems.

2. To comply with the new legislation, internet retailers would have to deal with an estimated 9,600 different state and local taxing authorities.  The law would impact web based retailers with annual sales of $1 million or more.  The retailers would have to comply with tax laws created by distant governments in which they have no representation and in places they do not consume any local services.

3. As early as today, the Senate may vote on a bill that was introduced only last Tuesday.  The text of this legislation only became available on the Library of Congress website a week ago.  And you thought ObamaCare was jammed through the Democratic House in a hurry.  The bill was packaged to allow it to go straight to the Senate floor for a vote—without going through committee and without time for analysis and discussion.

4. The fairness argument is based on brick and mortar stores being at a competitive disadvantage, because they have to collect sales taxes.  However, they do not have to collect sales taxes for other states when customers cross state lines to make purchases.  Can you imagine a level playing field that would require traditional retailers to ask every walk-in customer where they live so they can collect the appropriate state sales tax?

5. The law would require a centralized tax collector for each state or for a group of states that would gather both state and local levies from the online merchants.  This will mean 27 or more different auditors of a web based business.  This is better than 9,600, but still creates a huge increase in compliance costs.

6. Not all states have a sales tax, therefore their web-based businesses would now have to add the collection cost to their operations.

7. Big retailers like Amazon and Walmart support the law.  Amazon just happens to have its own tax compliance service it sells to other merchants.

8. Perhaps software will flawlessly determine, for example, what is classified as candy for tax purposes and what is considered as food in each jurisdiction.  The bill deals with this confusion by spelling out when a merchant is liable for errors and when a software vendor takes the blame.

Is taxing internet sales the “Right Thing to do?”  Before I answer that question there is one additional issue to consider—the rush to vote.  There are fundamental problems with the way this legislation is being rushed for a vote.  There is no justifiction for the Senate not to follow the usual procedure to have it first go to committee and then to be introduced and discussed.  This is not the “Right Thing to do.”  I was a supporter of leveling the playing field to help brick and mortar businesses to compete.  However, looking at the compliance issues whether it is directly with 9,600 different taxing authorities or through 27 or more centralized tax collectors, I agree with the 1992 Supreme Court decision that the burden is too big—sales taxes on internet sales should not become law.  As an alternative, why not have one sales tax rate for all states for internet sales, collected by the federal government and then allocated to states depending on the place of residence of the customers?  This might simplify compliance and meet the objective of increased state and local revenues.