Since the debate over Internet taxes began nearly 15 years ago – the issue of “fairness” has been at the core of what online tax proponents have said to be their ultimate policy goal – that is – taxing sales made by online stores and main street retailers equally.
Concomitant to that fairness argument has been the desire among state and local governments to capture what they consider to be foregone (as opposed to new) tax revenue. That the “Marketplace Fairness Act,” a bill that would establish a national sales tax collection mandate on Internet sellers, has now passed the Senate, is testament to the seductiveness of those twin arguments.
The evolution of online commerce however, has proven concerns over fairness to be misplaced. Likewise, state and local government concern over foregone tax revenue is simply not supported by the facts.
The superficial argument for the Marketplace Fairness Act is that if everyone is selling, everybody should collect taxes. Likewise, brick and mortar retailers have argued there is a built in advantage for online retailers. Fairness, therefore dictates that we should impose the same collection requirements on online sellers.
But the types of commerce subject to the Act are fundamentally different and can be taxed differently while still maintaining fairness. Physical retailers have just as many (albeit different) advantages as Internet retailers. Retail commerce remains a highly tangible experience. Outside of a few commodity items, most consumers still prefer to see, feel and try-on items before they buy. Many don’t want to wait for delivery, pay extra for shipping or deal with the hassle and difficulty of online returns. Other consumers prefer the ease of online ordering, particularly in rural states where travel to retail stores is not practical. These forms of commerce are fundamentally different and no fairness argument requires that they be taxed the same. Allowing both forms of commerce gives citizens of the different states, and different regions within a state, the choice and freedom to make the purchasing decisions that work best for them.
It is important to remember that according to the U.S. Census Bureau, in 2012, online retail sales totaled $225 billion – a number that still only represents six percent of all retail sales. Of that $225 billion, big-box retailers accounted for more than 83 percent of those sales. These are companies like Wal-Mart, Best Buy and Amazon.com – some of the most recognizable names in the marketplace. These online companies have brick and mortar stores in many or all states and as a result they are currently required to collect sales taxes in those states.
Were those sales to remain untaxed as proponents claim; that could certainly represent a problem for state and local coffers. But they are being taxed. As online retailers grow, and those companies establish themselves physically in more and more states, the sales tax collection requirement will attach without the need for Congressional intervention. The fact that the majority of online sales are already being taxed, is precisely why the so-called “Marketplace Fairness Act” is solution in search of a problem that has never come to pass.
As the Marketplace Fairness Act moves to the House for consideration, Virginia’s Congressional Delegation will have considerable influence on the final outcome of this legislation. Over the coming weeks and months, we will hear a lot about issues of fairness along with concerns over lost tax revenue.
It is important to remember, however, that existing sales tax law is incredibly durable. Empowering states to collect sales taxes on transactions that take place outside of their borders is a significant expansion of current state taxing authority and one that obliterates the link between local taxes, local services and the physical presence of a retailer.
If the purpose of the Act is to level the playing field and provide more tax revenue to state and local governments – it will do neither. Instead, the so-called Marketplace Fairness Act will only serve to place a unique burden on the thousands of small businesses that are critical to our economic growth and future prosperity.
Jim Gilmore was Governor of Virginia from 1998-2002. Governor Gilmore created the nation’s first secretariat of technology, established a statewide technology commission, and signed into law the nation’s first comprehensive state Internet policy. In 1999 he was appointed Chairman of the Congressional Advisory Commission on Electronic Commerce. The E-Commerce Commission opposed taxation of the Internet.
