It’s common these days for a shopper to visit a store, check out goods, ask questions of sales people, and then whip out a smartphone to place an order online, where prices might be lower because sales tax isn’t collected.
The “showroom effect” is crippling local businesses, and inequitable government policies on tax collection add insult to injury. Furthermore, as more people shop online, state and local governments are watching sales tax revenues dwindle.
Efforts to fairly tax Internet sales have failed over the years, but a bipartisan effort to level the playing field is gaining traction in Congress. Republican governors have been the key to converting their Capitol Hill colleagues. In tough budgetary times, they see the value in collecting taxes that are already owed.
Online buyers have long been responsible for reporting Internet sales for tax purposes, but most don’t do it. A House bill would permit states to tax online sales at the point of origin. Businesses would be responsible for collection, just like their brick-and-mortar competitors. The bill gets around a 1992 U.S. Supreme Court ruling that such taxes cannot be collected if the business does not have a physical presence in a state. Congress didn’t respond back then because the issue centered on catalog sales. But with the explosion of Internet commerce, the stakes have risen.
Online giant Amazon recently dropped its opposition to broadening sales tax collection, saying a streamlined federal solution would be easier to manage. However, other online businesses are keeping up the fight. They say myriad taxing jurisdictions would make collections too burdensome. But the House bill – along with a similar one in the Senate – calls for states to adopt some streamlining measures before imposing the law. Washington is already one of about 20 states involved in the Streamlined Sales Tax Project, which serves to simplify the process. This voluntary effort has netted the state an extra $32.56 million in the past four fiscal years, according to the state Department of Revenue.
The bills would also give businesses a cut of the sales tax to cover collection expenses; software is available to help with the task. Businesses with annual gross sales under $500,000 would be exempt under the House bill. The threshold is $1 million in the Senate measure.
Based on the House bill, the Department of Revenue estimates a potential net gain of $448.9 million for Washington state in fiscal year 2016, when compliance would presumably reach its maximum.
Under both bills, states would still choose whether to move forward. That states’ rights component has lured support from some conservatives. Still, critics such as U.S. Sen. Jim DeMint, R-S.C., grouse that this amounts to taxation without representation, but travelers already pay out-of-state taxes. If the concern is increased tax collections, states can choose to cut other taxes to maintain revenue neutrality.
The critical point is that government should avoid using tax policy to choose winners and losers in the marketplace. Equitable collections would fix that.