Economy & Budget

The lamest duck of all: Republicans shouldn’t push for Internet sales tax

internet sales tax
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internet sales tax

The election might be over, but politics isn’t. As a lame-duck president, Barack Obama will use his remaining days in office to push any outstanding policy proposals, either through Congress, also now a lame duck, or by executive order.

Also known as the silly season, this is when bad policy tends to rear its head. And of all things silly, pushing for an Internet sales tax bill is perhaps one of the worst.       

{mosads}The debate over collecting taxes on Internet sales is not new. For years, large retailers have aggressively lobbied Congress to enact new taxing authority that would allow states to reach across borders to collect revenues on Internet sales.

However, the Supreme Court’s 1992 Quill decision ruled that a company must have a physical presence in a state before it is liable for taxes.

While brick and mortar retailers have been demanding new legislation in the name of “fairness,” and state tax agencies are looking for ways to expand their tax bases, efforts to collect Internet sales taxes typically undermine state sovereignty and individual liberty. By expanding the reach of state tax agencies beyond their borders, consumers would be subjected to enforcement actions for which there is no public accountability. Consumers who have no vote for the governors or legislators controlling the tax rates would be subjected to fines and penalties imposed on them by these agencies.

This raises important constitutional questions as well as issues of federalism.

As for what’s fair, most brick and mortar stores have the advantage of instant transactions, with no shipping required, an important factor for most consumers. And shipping costs can often exceed the sales tax, wiping out any competitive advantage.

Finally, out-of-state companies do not receive any benefits from the state and local governments, such as fire and police protection. So it is not clear how taxing businesses in other states is “fair.”

Beyond the question of extraterritorial tax collection, the proposed bill would impose higher costs for both retailers and consumers, as well as substantial administrative burdens, especially for small businesses. There are almost 10,000 tax jurisdictions in the United States, making compliance a nightmare, especially for small out-of-state businesses or the small mom-and-pop online sellers.

And while e-commerce is growing, the revenues in question remain relatively small.

According the U.S. Census Bureau, e-commerce sales for the second quarter of 2016 were $97.3 billion, or 8.1 percent of total retail sales of $1.2 trillion. Even if all e-commerce sales were taxed at the highest combined state and local tax rate of 9.46 percent in Tennessee, forgone revenue is only just over $9 billion. It would be better to promote economic growth in a healthy climate of tax competition, rather than creating a system that allows onerous tax burdens to thrive.

Tax competition is healthy and forces states to temper their appetite for revenues to attract more businesses. But if federal law makes it impossible to escape burdensome tax collections, there is little urgency for states to compete based on their tax rates.

More recently, Rep. Bob Goodlatte (R-Va.) has introduced legislation attempting to avoid these problems, but he is finding this to be a hard needle to thread. Draft legislation attempts to address concerns of cross border tax collections, but negotiations suggest that the final product may shift back to a more complex and intrusive bill. The lame duck is not a time to rush through a complicated bill that paves the way for a new system of tax collection.

As the digital world without borders expands and plays a larger role in our lives, it makes little sense to attempt to partition it off through tax policies and regulations that were written before the Internet was created. Policymakers need to address these issues in ways that does not impede the evolution of new technologies that provide tremendous benefits for consumers.

Brandon is the president and CEO of FreedomWorks.


The views expressed by contributors are their own and not the views of The Hill.

Tags Barack Obama Bob Goodlatte

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