Internet Sales Tax Should be Dead on Arrival

The internet is one of the most exemplary free market and innovation success stories of our life time. Over the last few decades, it has helped grow the economy, expanded opportunities for entrepreneurs, and enhanced consumer choice for all Americans by allowing unprecedented access to online goods and services.

Unfortunately, internet freedom is under attack by politicians willing to distort markets and tilt the playing field toward their favored businesses at the expense of the vast majority of Americans who benefit from online marketplaces.

The latest attack on the internet and its users is internet sales taxation. Earlier this year, Reps. Kristi Noem (R-S.D.) and John Conyers Jr. (D-Mich.) introduced the “Remote Transactions Parity Act” (H.R. 2193) while Sens. Mike Enzi (R-Wyo.), Dick Durbin (D-Ill.), Lamar Alexander (R-Tenn.), and Heidi Heitkamp (D-N.D.), introduced a similar bill titled the “Marketplace Fairness Act” (MFA) (S. 976).

Although they vary slightly, both proposals allow state governments to tax out-of-state sales on internet-based transactions. If enacted, an internet sales tax of this kind would disrupt the free flow of commerce, impose revenue collecting compliance costs for millions of businesses, and brazenly violate the classic American principle of “no taxation without representation.”

The U.S. Constitution, as confirmed by the Supreme Court’s 1992 decision in Quill Corporation v. North Dakota, was designed to protect interstate commerce from this sort of federal intrusion among states. James L. Gattuso, Senior Research Fellow in Regulatory Policy at The Heritage Foundation, explains:

“Under Quill, states can require businesses to collect their sales taxes only if those businesses have a physical presence (a building, warehouse, or employees) in their state. For instance, if a customer living in Virginia buys a product from a retailer with a physical presence only in Maryland, the customer pays no sales tax because Virginia can’t force the Maryland retailer to collect the tax.”

Supporters of the internet sales tax seek to overrule Quill, and the Court noted in its decision that Congress has authority to do so under the commerce clause. However, related legislative proposals thus far are severely misguided.

Identifying the political factors at play is critical to informing policy solutions. As Heritage Action previously outlined:

“The MFA is simply a political ploy to line the pockets of revenue hungry state governments that don’t want to cut spending. Worse, major retailers are playing politics to drive out competition from small, Internet-based competitors. Many big businesses have a physical nexus in several states and already collect remit sales taxes for online sales specifically because of their physical nexus in a variety of states. They are working to convince small brick-and-mortar companies that they are on the same team — a team that wants to ensure small, online businesses have to bear greater tax burdens.”

Businesses like Amazon, who have a physical presence in almost every state, are also in favor of a convoluted federal internet sales tax scheme because it aligns with their current business model. The company announced earlier this year it would voluntarily collect sales taxes in every state that has a sales tax.  The various internet sales tax bills in Congress would not hamper big online retailers, but would punish small startup businesses and mom-and-pop remote sellers. As Sen. Ron Wyden (D-Ore.) warned in 2013, “an Oregon business would have to collect taxes for New York, but Chinese firms wouldn’t have to collect taxes for any State.” Wyden predicted that “people are going to end up calling” the internet sales tax scheme “the shop China bill.”

In addition to the mounting evidence that an internet sales tax would be economically detrimental, there is a generational divide among Americans. A 2013 Gallup poll found that 73 percent of Americans between 18 and 29 opposed an internet sales tax. 62 percent of those between 30 and 49 felt similarly. However, only 46 percent of those 50 and older opposed an internet sales tax. The RNC’s Growth and Opportunity report from 2012 urged lawmakers to “Promote forward-looking, positive policy proposals that unite young voters” whose “perception of the two parties was born during the Barack Obama era.”

Republicans in Congress should reject misguided efforts to pass an internet sales tax and instead focus on fulfilling their campaign promise to enact comprehensive tax reform that cuts rates and helps grow the economy. Passing an internet sales tax, especially in the context of a larger tax reform package, does the opposite. Heritage Action will continue to work with members of Congress to oppose internet sales taxation, and would key vote against a proposal should it come for a vote.  

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