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The Internet is no place for a sales tax

Good news: Congress and the White House agreed to a provision permanently banning taxes on Internet access earlier this year. The bad news? As part of the compromise, Senate Majority Leader Mitch McConnell promised the Senate this year would hold a vote on a different sort of Internet tax: sales taxes on online shopping.

A national online sales tax would be a logistical nightmare for consumers and small businesses across the country. Such a law would require many sellers of goods or services online to collect from their customers local sales taxes for the jurisdictions in which the customers live.  If enacted, online shopping would become prohibitively complicated and expensive.

{mosads}How would this work in practice? The online sales tax proposal with the most momentum, S. 698, the so-called “Marketplace Fairness Act,” would require remote sellers to collect and remit sales taxes based on where their customers live. A small clothing shop in New York that sells products online, for example, would have to charge customers across the country in Seattle the 9.6 percent combined sales tax Seattle shoppers pay, even if the customer has never set foot in New York.

Consumers would experience a big tax hike under the proposal, seeing their online shopping bills go up by an estimated $23 billion. The average combined sales tax across the nation is already 8.45 percent, and those living in states with particularly high sales taxes, such as Tennessee, Arkansas, Alabama, or Louisiana, would face even more of a tax burden.

All generations of Americans would feel the impact of this tax, as nearly 80 percent of the population over the age of 15 shopped online in 2014. But the Millennial generation would be especially would be especially hard hit. Over one-third of Millennials prefer online shopping to going to stores in-person, according to a recent study. Internet sales taxes would discourage this generation from making online purchases nearly as often.

And small-to-mid-sized businesses and entrepreneurs would suffer as well. They’d be responsible for collecting and submitting taxes to the many states and localities their online customers come from. That’s a daunting task, given that there were nearly 10,000 different U.S. tax jurisdictions as of 2014, and that number grows every year.

That new complexity is precisely why some big businesses love the idea of an Internet sales tax—it will help erode their completion. Large-scale retailers have far less trouble keeping up with our nation’s dizzying array of tax codes. A mom and pop store or a struggling startup, on the other hand, doesn’t have the same advantages. Nor do they usually have the profit margin needed to spend more on sales tax compliance, especially when you consider an estimate from the trade publication Tax Analysts that keeping track of sales tax rules accounts for 60 percent of small business compliance costs.

Given that many small-to-mid-sized businesses are still struggling with our slow economic recovery, a new tax burden could force painful tradeoffs. According to one retail tax expert from the consulting firm McGladrey, these businesses could be forced to “fold up shop or heavily limit where they’re willing to sell.”

This new tax collection responsibility would also open up small business owners to harassment by aggressive tax collectors from across the county. In turn, some online vendors would be forced to view new customers as potential tax liabilities. And while huge corporations have the influence to negotiate with local tax regimes for exemptions and tax breaks, small businesses don’t have that luxury.

All of these disadvantages could potentially turn online shopping into the exclusive realm of “big-box” retailers, ruining a marketplace that is currently accessible to nearly everybody.

In addition to the logistic and economic problems inherent in online sales taxes, there’s also well-established legal precedent for why they shouldn’t happen. S.698 conflicts with an earlier U.S. Supreme Court decision, Quill Corporation v. North Dakota, which ruled that businesses did not have to collect sales taxes in states or localities where they had no physical presence.

Congress should ensure that the Internet remains open and free by opposing such legislation and protect hardworking Americans from ongoing attempts to slap taxes on online sales. There’s nothing fair about these tax plans, no matter how lawmakers brand them. Lawmakers should specifically reject efforts to side-step the regular committee process and attach this measure to “must-pass” bills. 

Harbin is the director of federal affairs and strategic initiatives at Americans for Prosperity.

The views expressed on the Congress Blog are the author’s own and not the views of The Hill.

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