Internet Sales Tax Myths and Facts
As discussion continues over proposals like the “Marketplace Fairness Act” – which would change the way states can exercise tax collection powers over “remote” sales – several myths have cropped up. Here, NTU dispels them:
Myth # 1: This is a States’ Rights Issue.
FACT: Giving states the power to collect sales taxes across their borders isn’t about states’ rights, it’s about state coercion. Governments would have fewer incentives to keep their own tax rates low, eroding the important federalist principle of tax competition.
Myth #2: We need to enact this bill as soon as possible.
FACT: There’s no good reason to rush into such an enormous and controversial tax policy matter. While some have stated this issue has been on the docket for almost 10 years, the reality is that there is still a lot of work to be done, such as holding hearings on alternatives to the Marketplace Fairness Act.
Myth #3: Online stores enjoy a “special loophole.”
FACT: What Marketplace Fairness Act supporters call a “loophole” is actually the physical presence standard, a firmly grounded constitutional doctrine the Supreme Court has upheld for decades to protect businesses and their customers from predatory tax administrators. The physical presence safeguard helps to protect taxpayers from many types of aggressive policies that could affect income, property and other taxes.
Myth #4: The Marketplace Fairness act will “level the playing field” between online and brick-and-mortar stores.
FACT: While the Marketplace Fairness Act would require remote sellers to collect sales tax on every item, it would force them to do so by a completely different and harsher set of rules than currently exist for brick-and-mortar sales. If the Marketplace Fairness Act were to pass, states could strong-arm remote sellers into complying with more than 9,600 separate sales tax jurisdictions across the country, forcing online retailers to quiz each and every customer about their residency – something no brick-and-mortar retailer is required to do.
Myth #5: Compliance is easy.
FACT: Because they would now answer to 9,600 tax jurisdictions across the country, remote retailers would have to shoulder heavy overhead costs just to meet their new tax collection liabilities. The sponsors even recognize this, however imperfectly, through a paltry exemption in the legislation for businesses with remote sales of less than $500,000/year. However, a 2006 PricewaterhouseCoopers study demonstrated that small businesses with sales between $1 million and $10 million still face enormous costs that would threaten profitability, causing significant harm to interstate commerce and the economy during an especially fragile time.
Myth #6: States need to collect Internet sales taxes to balance their budgets.
FACT: Instead of pursuing one cash grab after another, states need to cut spending to get their budgets in order. Some standout states are actually enjoying relatively good growth compared to their poorer neighbors – they are the states that pursued free market reforms, eliminated waste, and controlled growth of government to create a competitive economic climate that attracts jobs and workers. The Marketplace Fairness Act nullifies an important facet of that competition by doing away with the long-held physical presence standard for taxation.
Myth #7: All the Internet retailers support it.
FACT: There is no consensus among online retailers in favor of destination-based sourcing. As is usually the case when government gets involved in the marketplace, those who would benefit the most from the legislation are lobbying in favor of it, and those who would be harmed are working hard to stop it. Nor is the general public clamoring for it. A December 2012 Mercury poll of 800 likely voters asked the neutral question about whether they supported “allowing states to make online retailers collect and process sales taxes on Internet purchases based where the customer is located, regardless of where the retailer is physically located.” By a 48 percent-41 percent margin, respondents were opposed. When given a more realistic description of the bill, “The proposed legislation would allow tax enforcement agents from one state to collect taxes from online retailers based in a different state,” opposition rose dramatically: 61 percent to 28 percent.
Myth #8: This tax is the only, best fix to the problem.
FACT: Instead of creating schemes that could open-up a Pandora’s box of unstoppable tax-grabs on the part of cash-starved states on unsuspecting citizens, states could move forward with origin-based sourcing sales tax plans, where the business charges all customers one rate of tax, based on the jurisdiction in which that business is located. If Congress takes any action on Internet sales tax collection, it should be in pursuit of uniform origin-based sourcing to preserve proper limits to taxing authority and encourage tax competition.
Myth #9: Retail sales on the Internet are “tax-free.”
Fact: Under existing law, a remote mail-order or Internet sale between a customer and a business located in the same state is subject to sales tax – a not uncommon occurrence in large states. Furthermore, Internet-based businesses pay profit and property taxes the way many other businesses do. Because they rely so heavily on telecommunications to stay connected, some online sellers may have proportionally heavier burdens of taxes associated with these technologies. When customers shop on the Internet, the shippers pay fuel and other types of transportation taxes.
Myth #10: The Internet is “destroying Main Street businesses.”
Fact: The Internet has enabled “Mom and Pop” retailers to advertise their products and services to a whole new world of consumers. It has also provided practical money-saving technologies that have allowed numerous traditional firms to survive and thrive, including online tax preparation services, better inventory management, and ease of ordering various inputs necessary to producing their finished goods. In 2012, research by The Boston Consulting Group found that “small and medium-sized companies that embrace the Internet in their business operations grew by 10 percent annually in the last three years, adding jobs as they did so.”
For more, in-depth information on the Marketplace Fairness Act including papers, testimony, and letters please visit www.NTU.org. Please contact Federal Affairs Manager Nan Swift (nswift@ntu.org) with any questions or comments.