OPINION: Tax “fairness” for Main Street unfair for taxpayers
As many state governments struggle to balance their budgets, it should come as no surprise that politicians are looking for new revenue sources. Proposals to require the collection of state sales taxes on purchases made online are back in play because, it is said, public treasuries are being starved of needed cash, and local “brick-and-mortar” retailers are being injured as more and more commerce shifts to a tax-free Internet.
A 24-state coalition, including Utah, has renewed its demand that all online retailers be forced to collect sales taxes on behalf of the 45 states where customers would owe them if they made their purchases locally. That policy goal, which has brought a gleam to many a governor’s eye since at least 1999, will be achieved if legislation introduced by Sens. Dick Durbin, D-Ill. and John Conyers, D, Mich — the so-called Main Street Fairness Act — is passed and signed into law.
Sounds reasonable, doesn’t it? After all, the buyer of a CD, DVD or almost anything else in Logan will owe 4.7 cents to the state for every dollar spent. The United States actually has 30,000 separate sales tax jurisdictions; the proposed law, at least for now, applies only to state sales taxes and not to those levied by local government entities or special tax districts. Why should anyone avoid paying the same tax by ordering from Amazon.com, or downloading music or movies from iTunes or Netflix?
The answer is found in Art. I, Sec. 8 of the U.S. Constitution, which delegates to Congress authority to “regulate Commerce among the several States”. Some scholars see acceptance of the Commerce Clause as decisive in establishing our Republican government. Promoting the economic prosperity of the nation as a whole by stopping individual states from taxing or otherwise interfering with the free flow of internal trade emerged as a point of agreement in Philadelphia, around which compromises on other constitutional provisions became possible.
Consistent with the Constitution’s plain language, the Supreme Court ruled in 1992 (Quill Corp. v. North Dakota, 504 U.S 298) that a state couldn’t collect sales taxes on mail-order purchases from an out-of-state retailer unless the seller had a “physical presence” in the customer’s home state. The door was left open for requiring buyers voluntarily to report and pay equivalent “use” taxes on items purchased elsewhere, but for obvious reasons that duty has not been enforced.
But with billions of dollars in tax revenue up for grabs – it is estimated that consumers will spend $11.8 billion online next year — the debate is reheating. Supporters of legislation aimed at overturning “Quill” contend that closing the online tax “loophole” is not the same thing as levying a new tax but simply “levels the retail playing field.”
Opponents of such taxation emphasize that electronic commerce does in fact generate substantial revenue for state governments from a variety of sources, including gasoline, business and personal income taxes collected from the private companies that deliver customers’ orders.
Overlooked by virtually everyone voicing opinions on “e-taxes,” are the substantial benefits to taxpayers of America’s federalist government. As in ordinary markets, competition between the 45 states that now levy a sales tax helps keep those rates in check. If one state imposes a sales tax higher than justified by the quantity and quality of public services those taxes help finance, its tax base will shrink as businesses and households relocate to states where taxes are lower, public goods and services are better, and government generally is more responsive to citizens’ preferences.
Moving is costly, though. Avoiding high state sales taxes by making purchases online or through mail-order catalogs is another margin on which inter-jurisdictional tax competition forces governments to be more fiscally responsible.
A tax-free Internet does place local retailers at a competitive disadvantage. “E-tailers” are disadvantaged, too, if they charge for shipping and handling; online customers also must wait for delivery and are less prone to buy on impulse. Local retailers can respond to the online competitive threat by providing point-of-sale services valued by customers, such as friendly service or the chance to try on a new pair of shoes prior to purchase.
Because sales taxes are highly regressive, placing their heaviest burden on low-income consumers, lobbying state legislatures for lower tax rates is another way for “physical” retailers to do well.
The Main Street Fairness Act is not just about Mom-and-Pop. Wal-Mart and other national chains operating brick-and-mortar retail outlets, in many different states, also stand to gain, because their virtual competitors would lose a pricing edge by having to collect sales taxes, too. Wal-Mart and state governments may consider that outcome to be “fair,” but everyone whose sales tax bills go up surely will not.