Oct 10

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Heritage Sentinel update (10/6) – Internet sale tax myths and facts


Heritage Action Sentinel LogoSentinels,

In September, Congress voted to pass a continuing resolution (CR) to fund the government through December 11, 2014. As the bill only extended funding for two months, it requires a post-election lame duck session during which defeated politicians can attempt to address any number of liberal agenda items.

Conservatives must be on guard during this session, as there is already a loud cry from both parties to “clear the deck” and pass bad legislation either while liberal votes are still available or to avoid the need to address politically controversial issues in the new year.

Over the next few weeks, we want to deep digger in to some of these issues conservatives will need to guard against. This week’s dive is into the Internet Sales Tax. If you would like the PDF version of this week’s call notes, they can be found here.

Weekly Call Notes (10/6/14)

The House and Senate are not in session.

Internet Sales Tax: Last spring the Senate passed the Marketplace Fairness Act (S. 743) to allow states to reach across their borders to force out-of-state retailers to collect and remit their sales tax for remote purchases. Recognizing many problems with the bill, the House has not acted on it. A bipartisan group of senators is now trying to attach the Internet sales tax scheme to the extension of a House-passed Internet tax moratorium in order to jam it through the House. The recently-passed continuing resolution (CR) included a short-term extension for this Internet tax moratorium that expires on December 11th. This means the Democrat-controlled Senate could attempt to push through an Internet Sales Tax (IST) during the post-election lame duck session.

Claim » Current purchases made on the Internet are tax-free. 

Reality: Internet sales are subject to tax, just the same as all other sales. A recent e-commerce survey found that over 50 percent of online shoppers have paid a sales tax on their latest purchase. All retailers collect sales taxes on goods delivered in any state where said retailer has a physical presence. This is why consumers pay sales taxes on catalog or online orders from a company that owns and operates locations within that consumer’s home state.  

On purchases made from out-of-state sellers, states have authority to charge a “use tax”. Consumers are required to pay this tax regardless of whether the purchase is made online or at an out-of-state brick-and-mortar. States have griped that few consumers pay use taxes on purchases from out-of-state sellers. However, most states have done little to enforce use taxes or to educate consumers about this obligation. This suggests that either there is not enough revenue generated for the states to pursue, or the burden of collection would be too great on taxpayers.

Claim » Without an IST, online retailers have an unfair advantage over traditional, brick-and-mortar stores. 

Reality: The government should certainly pursue the ideal of fairness as far as possible, without violating certain core principles of proper governance; in this case, the IST’s attempt to “level the playing field” would simultaneously interfere with the protections of federalism while inflating the size of government and its involvement in private transactions.

Furthermore, this attempt at fairness would go too far and actually result in greater inequities. While an IST would require remote online sellers to collect taxes on every purchase, it would compel them to do so by a much different set of rules than that which exists for brick-and-mortar stores. States would have the power to coerce remote sellers into complying with nearly 10,000 separate sales tax jurisdictions, forcing online retailers to retrieve consumer information regarding their residency (no brick-and-mortar store is required to put customers through this strain, nor do they have to run the hurdles of compliance in the aftermath of each sale).

Claim » An IST would only impact a small percentage of U.S. small businesses.

Reality: Approximately 60 percent of small business retailers offer sales on the Internet. This tool allows traditional “mom and pop” stores the ability to compete on a much larger stage. It has also provided practical money-saving technologies that have allowed traditional firms to thrive, including better inventory management and ease of ordering. An IST would saddle these businesses with the burden of collecting state taxes for over 10,000 tax jurisdictions, each with its own tax rates, holidays, thresholds, caps, and auditors.

Claim » The IST proposal will not harm small businesses dramatically since it includes an exemption for businesses whose sales total less than $1 million annually.

Reality: The distinction to note is $1 million “in sales,” not in profits, which means the cap is not as expansive as it may sound. Further, the result of this exemption is a perverse incentive for retailers to stay small, not growing on purpose, and failing to create jobs.

If IST supporters agree that this policy would be a burden small businesses should be spared, then they must admit it is a burden for everyone. 

Claim » Navigating different state taxes would be as simple as following a chart or using a specific software. 

Reality: Within the 46 states that have sales taxes, there are avalanches of specific option taxes, special exemptions for products and constantly altered rules and regulations. This burden is far beyond the endurance of most small online retailers and their limited staff.

One Sentinel in Florida explained that as the head of accounting for a large corporation (with a brick-and-mortar presence in many states), he and a team of six accountants were tasked with complying with the paperwork from a large volume of internet sales. They were required to file state income tax returns in many of the states that had both sales and income tax, and fielded requests from some of the 10,000 municipalities in other states to fill out and pay local business licenses. This Sentinel asked, “How could small mom-and-pops ever be expected to comply with all this?” 

Claim » The IST is an issue of states’ rights. 

Reality: Allowing states the power to collect taxes beyond their borders is not adhering to their rights, but rather is an expansion of them in a dangerous and unaccountable manner. This is a blatant violation of the principles of federalism and as a result, state governments would have fewer incentives to keep their own tax rates low, eroding tax competition.

Business owners will be at the mercy of far away local governments to which they have zero connection. Heritage Foundation Senior Research Fellow James Gattuso summarizes some of the consequences on productivity:

“Economically, the costs—from job losses to reduced investment—that result from the burdens imposed on retailers would be borne by the home state, not the taxing state. Politically, there would be little reason for out-of-state politicians to care—as the owners and employees would not vote in the taxing state’s elections.”

Claim » States must collect an IST to generate enough revenue to balance their budgets.

Reality: A state should not attempt to balance its budget by taxing businesses in other states through an IST. True to the principles of conservatism, these states should instead seek to cut spending to set their budgets in order. 

Claim » The IST must be passed to ensure that the ban on taxing internet access is passed as well. 

Reality: These two pieces of legislation are entirely unrelated. The bipartisan Senate coalition has attempted to tie them together in an effort to jam through the IST, but the ban on taxing internet access is long-standing, bipartisan and uncontroversial. The IST is controversial and simply does not have enough support in the House of Representatives without a manufactured crisis.

Stephanie Kreuz
Midwest Regional Coordinator

Heritage Action for America
Cell: 202-258-4703
Twitter: @skreuz

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