The Myths

The Facts

"The Marketplace Fairness Act recently introduced in the Senate would require online retailers to collect and pay sales taxes to states where they have no physical presence or democratic recourse. Overstock.com, eBay and the like could have to pay sales taxes to any state from which an Internet user placed an order."

"Pay" is misleading; the retailer simply remits taxes collected from the consumer.

"Such online sales tax proposals are taxation without representation."

False. The tax is imposed by the state to which the goods are shipped. The consumer in that state pays the tax and ordinarily has a vote in that state (except for felons, tourists, etc.).

"The Supreme Court ruled (in Quill Corp. v. North Dakota, 1992) that retailers can be required to collect sales taxes only in states where they have a physical presence."

The Court further said "…that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve."

"Consider the absurdity of such a law. When a customer buys a product in a store, does the cashier ask for the customer's home address? Of course not. The store simply charges the state and local sales taxes applicable for its physical location, no questions asked.

"The proposed law would hold online sellers to an entirely different standard. Websites would have to add taxes to a sale based on the shipping destination of the product, which may be a state in which neither the seller nor the buyer resides. We would never ask mom-and-pop store owners to do such a thing."

For over the counter sales, the point of delivery is the counter. For other sales - whether online or not, whether large retailers or "mom and pop" stores - it is the destination to which the goods are shipped. All sellers are treated the same for tax collection purposes, except that remote sellers currently enjoy a federal exemption from collection.

"Politicians want this bill passed to raise new tax revenue for broken state governments facing budget shortfalls. But legislators in state capitals don't want to make the hard decisions to cut spending or raise taxes on their constituents-they fear the voter backlash."

States across the political spectrum continue to act far more fiscally prudent than the federal government. They have made hard decisions to cut spending; during the current recession, state and local government employment has dropped significantly, but federal government employment has continued to increase. State lawmakers have made and will continue to make tough choices. With regard to sales tax collection, state legislators have no choice but to turn to Congress. As the Court has said, Congress has the ultimate authority in this area.

"So they'd like their allies in Washington to make it legal for them to tax people who can't vote against them."

False. Those paying the taxes - who are legally required to pay them now but frequently don't - are constituents in the states in which the taxes are owed.

"At its core, this is a nationally mandated Internet sales tax on businesses."

False. Each state would maintain its own sales tax system, or continue to choose to impose no sales tax at all. Residents in states without a sales tax would continue to shop "tax free" on the internet and on main street. Residents in states with a sales tax would pay exactly what they owe today, not a penny more.

"The burden on Internet entrepreneurs could be staggering. There are already nearly 10,000 state, local and municipal tax jurisdictions to navigate nationwide."

Congress has the authority to determine under what circumstances remote sellers can be required to collect. The pending bills require significant tax simplification

"2006 PricewaterhouseCoopers study found that tax-compliance costs for small businesses (those having $1 million to $10 million in annual sales) are nearly 2.5 times greater than those of larger firms. For businesses under $1 million in sales, those costs explode to 16 cents on every dollar of revenue."

The data for the study, and the initial drafts of it, are far older than 2006. By design, the study did not take into account the significant tax simplification already adopted by half of the sales tax states or the simplification required in the federal bills. Those simplifications radically reduce the cost of sales tax compliance.

"And woe to online sellers if they have a dispute with one of the many states that will be unleashed to tax them. A small business owner in South Carolina could face simultaneous audits from California, New Jersey and Hawaii, with no political recourse."

Small sellers are highly unlikely to face any audits, let alone simultaneous audits. States perform sales tax audits on fewer than 1% or retailers annually, on average.

"...they included an exemption for companies with less than $500,000 in annual sales. But that is a very low threshold to cross."

The threshold is $500,000 in annual online sales. If that is too low, then what is the correct threshold?

"Businesses will be...encouraged to locate overseas...."

False. States currently collect income taxes from foreign companies, even when those companies are exempt from federal taxation. States would be able to require that foreign companies collect sales tax, just as domestic companies would be required to do.

"Nor would these new Internet taxes satisfy tax-hungry politicians. Already Maryland Gov. Martin O'Malley, a Democrat, has called for a 6% tax on all downloads-music, movies, e-books and more-from vendors like iTunes."

Maryland voters can vote out Governor O'Malley. Furthermore, these federal bills wouldn't materially affect Maryland to tax downloads; iTunes (Apple) already collects sales tax in every state that imposes a tax on digital goods.

"It probably wouldn't be long before the burdens of complying with myriad state sales tax laws led to talk of a streamlined national sales tax to replace it, with Washington taking a cut and destroying our nation's healthy tradition of state tax competition."

Is Congress powerless to resist a national sales tax, with "Washington taking a cut"? 

"Today's origin-based sales tax system, which allows states to tax purchases made at any business within their borders, is fair."

Sales taxes are not origin based in most states, and no state uses an origin basis for interstate sales. Consumers in sales tax states are required to pay tax on all taxable purchases, regardless of where the seller is located. The fact that some consumers evade those taxes, intentionally or not, is not an excuse to exempt online sellers from collecting.

"If states want to raise taxes they have the power to do so-yet only on citizens and businesses within their political jurisdiction."

To reiterate, it is only the citizens and businesses in their political jurisdictions that actually pay the tax; remote sellers would merely collect the tax.

"The nexus among Americans, their taxes, and their votes must remain as tight as possible. It is the essence of our democracy."

This is exactly why an origin based system for interstate sales is such a poor idea: it would impose the sales tax regimes of all the other states on South Carolina residents when they shop online. The federal bills would ensure that South Carolina residents pay sales tax only to South Carolina, and that the act of paying those taxes imposes the least burden possible.