The U.S. Senate last week took up a bill that authorizes every state government to require Internet sellers to collect sales taxes on goods shipped to customers in that state. This overdue legislation would correct a legal loophole that gives an unwarranted competitive advantage to out-of-state Internet sellers and hurts local businesses.
The Supreme Court ruled in 1992 that a retailer must have a physical presence in a state before it can be required to collect that state’s sales taxes, but said Congress could pass a law overruling this finding. Since 1992 on-line sales have expanded dramatically, reaching a nationwide total of $223 billion in 2012, according to the U.S. Commerce Department.
Congress should pass the bill to overturn the outdated Supreme Court ruling.
The bill is fair because it eliminates a big competitive advantage enjoyed by out-of-state Internet sellers over in-state retailers, who must charge sales tax. Its passage would improve the vitality of local businesses and significantly increase state and local revenues.
For example, a study by the University of Tennessee cited by the National Conference of State Legislatures calculated that states lost $23.3 billion in uncollected sales taxes from Internet sales in 2012. South Carolina’s share was $254.3 million.
A study of this issue by economists at Stanford University found, unsurprisingly, that consumer choices are significantly influenced by changes in tax rates.
If the Senate bill becomes law, consumers who can no longer escape state sales taxes when buying big-ticket items such as appliances and televisions might turn to local suppliers instead of big Internet sellers. It would remove a disincentive for big box retailers from adding stores in states with sales taxes.
All of this would help economic growth in South Carolina and other states with sales taxes.
A letter from eBay, a leading opponent of the bill, to its customers claims the bill is “wrongheaded and unfair,” in part because it would require small businesses to collect sales taxes for “more than 9,600 tax jurisdictions across the U.S.” It defines small businesses as having sales of $10 million or less a year.
Reasonable people may disagree on the size of a “small business,” but the alleged administrative complexity of the proposed law is a chimera.
The bill before the Senate exempts businesses with annual sales of $1 million or less from having to comply with state taxes on Internet sales. Businesses subject to the taxes would be notified by each state of their tax obligations and would send collections to a single state agency. States must provide free tax software to vendors to simplify their reporting and tax return.
That’s fair, and practical. This bill should become law.