States already can tax out-of-state purchases, but rarely enforce those laws

Article Highlights

  • There is no "sales tax exemption" for out-of-state vendors. State and local sales taxes are owed by consumers.

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  • State/ local governments want a federal law allowing them to impose taxes on out-of-state sellers, instead of consumers.

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  • Even at the state level for which the pending bills are intended, the "tax fairness" argument makes no sense.

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WASHINGTON -- For the umpteenth time, senators and representatives of both parties have introduced bills to subject Internet and catalogue sellers to the same sales tax collection and remittance obligations that apply to local, bricks-and-mortar sellers.

Mercifully, the latest attempts to ensure "fairness" and to protect "Main Street" from the ravages of interstate commerce will go where all previous efforts have gone: nowhere.

There is no "sales tax exemption" for out-of-state vendors. State and local sales taxes are owed by consumers, not producers. If the good or service is provided by an in-state firm, that firm must collect the applicable sales tax from the consumer. If the stuff comes from a "remote" seller that has no contact with the consumer's state, the sale is not "tax-free": the consumer owes a "use tax" equivalent to the local sales tax.

However, state and local governments would rather not trouble their own citizens with enforcing that rule. Thus, they demand a federal law that would allow them to impose collection and remittance obligations on out-of-state sellers whose goods or services happen to be demanded, and therefore end up, in the local jurisdiction.

What we have here is not a tax or equity problem but an enforcement problem. And no one, including the state officials and federal legislators who yelp about "fairness," seriously believes that that problem warrants a central solution.
"What we have here is not a tax or equity problem but an enforcement problem." -Michael S. Greve
Apple and its ilk sell valuable software and apps around the globe, much of it "untaxed" when downloaded. If someone proposed that our corporations should calculate, assess, collect and remit sales taxes on products purchased by people in Absurdistan or Zimbabwe - California, a ringleader in the campaign for internet sales taxes, would be unlikely to rejoice over international tax fairness. More likely, it would complain about an unconscionable assault on its industries.

Ignore the globe, and consider the neighborhood: in many states, sales and use taxes vary from county to county and even terminal to terminal. The Dallas-Fort Worth Airport alone sports more than a dozen tax jurisdictions.

Would your local bakery - a five-minute drive away, but quite possibly in a different tax jurisdiction - volunteer to do what the retail lobbies demand of interstate sellers: obtain your address, calculate the applicable tax for each customer and collect and remit it? Hardly!

State politicians who insist on such a system on a national basis - on "federalism" grounds, no less - should first explain why it shouldn't first be tried in their own states. Whatever happened to states as "laboratories of democracy"?

Even at the state level for which the pending bills are intended, the "tax fairness" argument makes no sense. So long as Delaware remains a sales tax "haven," buses of shoppers from New York, New Jersey, Pennsylvania and Maryland will keep coming. What are we going to do about it - erect TSA-style checkpoints and collect user taxes at the Holland Tunnel? Have the Delaware malls check shoppers' driving licenses and collect their sales taxes? Again, unlikely.

"Tax-free" Internet shopping simply expands to consumers across the country an opportunity that has been and always will be available to consumers just across the border of tax-free states. How unfair!

The siren song of Internet "tax fairness" lures some economists who demand that the world should kindly conform to their blackboard efficiency models; it attracts state politicians who would rather regulate and tax outside corporations than their own citizens; and it entices federal politicians and Beltway bandits who relish brawls between roughly matched constituencies such as local retailers versus internet sellers. Neither side can win.

But neither can afford the threat of losing, and so the campaign contributions, consulting contracts and lawyers' fees keep gushing. It's a huge waste of money, but a tolerable price to pay for the current messy but tolerable system.

Michael S. Greve is the John G. Searle Scholar at the American Enterprise Institute and an adjunct professor at Johns Hopkins University.

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