Only Largest Companies Could Survive Internet Sales Tax Plan

About Adam Thierer:

Adam Thierer is a senior research fellow for the Mercatus Center at George Mason University.

State and local governments already possess the unambiguous right to tax Internet sales that originate within their own borders, but taxing extraterritorially across their own borders violates the Constitution and would require the blessing of Congress. Federal lawmakers should not cede them that power.

Those advocating greater state-based taxation of online, interstate transactions promise to simplify the crazy-quilt of overlapping state and local sales taxes imposed by over 7,000 jurisdictions. They claim that this would lessen the enormous compliance burdens that would result from new Internet taxes. Yet, the so-called "Streamlined Sales and Use Tax Agreement" they offer as a solution runs over 200 pages and remains riddled with loopholes and complexities that could burden vendors. That is tax "simplification" that only the largest companies could handle.

[See a collection of political cartoons on the economy.]

Many of the smallest mom-and-pop operators would struggle to comply. Greater industry consolidation and less competition and consumer choice could be the unfortunate result.

Worse yet, this effort would discourage vigorous interstate tax competition and make it easier for governments to raise sales tax rates on consumers. In essence, what the "Streamlined Sales and Use Tax Agreement" proposes is a state-based national sales tax cartel for the Internet.

There is a better way to achieve fairness without sacrificing tax competition or opening the doors to unjust, unconstitutional, and burdensome state-based taxation of what is unambiguously interstate commerce. Congress should adopt an "origin-based" sourcing rule for any states seeking to impose sales tax collection obligations on interstate vendors. Traditional sales taxes are already imposed at the point of sale, or origin.

[Read the U.S. News debate: Is a Flat Tax a Good Idea?]

Why not tax net sales the same way? Under an origin-based sourcing rule, all sales would be sourced to the principal place of business for the seller and taxed accordingly.

State officials protest the vigorous tax competition that such a sourcing rule would spawn since some companies might locate their business in more hospitable tax environments. But this system would be in line with Constitutional protections for interstate commerce, allow for the continued growth of the digital economy, and ensure that excessive, inefficient taxes do not burden companies and consumers.

Tax competition—not a massively burdensome multistate sales tax cartel—is the way forward.

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Tags:

business,

shopping,

internet,

sales tax