The most overlooked tax loophole: Internet sales

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As e-commerce grew, states wanted to collect the sales tax owed on every retail purchase whether it was an in-store, online or catalog purchase. The Supreme Court, in the 1992 Quill decision, said states lacked the authority to enforce their own tax laws and needed permission from Congress to collect sales tax from online retailers. After ignoring the issue for two decades, congressional inaction has created one of the largest tax loopholes of our lifetime. It deprives state and local governments of the revenue they rely on to maintain our schools, fix our roads and support local law enforcement, among many other things. And that’s not right.   

The federal government needs to move away from policies that favor some businesses over other businesses and some taxpayers over other taxpayers. I believe in state and local government rights. As a former mayor and state legislator, I strongly believe in allowing states the authority to collect sales tax from all retailers if they choose to do so. This is why I introduced the Marketplace Fairness Act with Senators Dick Durbin (D-Ill.) and Lamar Alexander (R-Tenn.). States should have the authority to decide to collect or not to collect sales tax without having to a get thumbs up from Washington.

Let’s clear up one thing: this is not a new tax. The Marketplace Fairness Act is not about new taxes. No one should tax the use of the Internet. No one should tax Internet services. I do, however, have concerns about using the Internet as a sales tax loophole. Some—mostly taxpayers and out-of-state businesses who enjoy being subsidized by the loophole—argue that we are creating a new “Internet tax.” This is wrong. We are talking about an existing state tax that purchasers already owe. And it is a tax on all sales, not on the Internet itself.

If sales over the Internet continue to go untaxed and electronic commerce continues to soar, Congress is openly supporting a tax loophole that would force increases in other taxes - such as income or property taxes - to offset the growing loss of sales tax revenue. We do not want this to happen.
When you purchase a hammer in a hardware store in my hometown of Gillette, the retailer collects the sales tax. If you were to purchase that same hammer online, you still owe the tax regardless if the retailer collects it or not. But most taxpayers are not aware of their tax responsibility, and states and municipalities don’t have the resources to enforce payment of the tax. So states and cities are left in a pinch, and our legislation provides those states and cities with an option to collect the tax in a way that is both simple and familiar to consumers.

At a time when states are increasingly turning to the federal government for program funding, it makes sense for Congress to allow states to collect more of their own revenue. People feel state and local governments do a better job putting the money to good use than Washington.

Support for the Marketplace Fairness Act is as widespread as it is bipartisan. Republican and Democrat governors and legislators, local business groups and Main Street retailers, and even many online retailers all realize that its time to stop discriminating through the tax code and close the Internet sales tax loophole. If enacted, it could provide approximately $23 billion this year alone in fiscal relief for the states and local governments who can no longer rely on Washington for handouts.

Our legislation gives states the right to make their own fiscal decisions, giving more power to the states. It closes a sales tax loophole that has puts local and Main Street retailers at a disadvantage. It simplifies the country’s more than 9,000 diverse sales tax jurisdictions, and exempts businesses with less than $500,000 in annual online sales from collection requirements.

I’ve always said you can’t flush your toilet over the Internet, and we surely can’t teach our children or pave our roads over the Internet either. States need the ability to make their own fiscal decisions and the Marketplace Fairness Act allows them to do just that, without raising taxes and without burdening small businesses. Whether you believe in states’ rights, business fairness or simplifying the tax code, the Marketplace Fairness Act is a bill we can all come together on and close the most overlooked tax loophole.

Enzi is the ranking Republican on the Senate Health, Education, Labor and Pensions Committee.