A Fair Way to Tax Internet Sales

April 18, 2018

by Rob Roper

The Supreme Court is hearing arguments about if and how we should tax sales made over the internet. As of now, retailers are not required to collect a sales tax unless they have a “physical presence” in the state/municipality where the buyer resides.

With the explosive growth of online shopping, said states and municipalities complain that they are losing out on billions of dollars in sales tax revenues, and the laws hindering the sales tax collection, which were made for mail catalogue companies, are outdated and ill-suited to today’s economic realities. They have a point.

Local “brick and mortar” stores complain that the fact that they do have to collect sales taxes for the state(s) in which they operate puts them at an unfair disadvantage to their online competition. They have a point, too.

However, if the Court rules to overturn the ban on requiring on-line shoppers to pay sales tax, on-line sellers will have to collect and remit taxes to not one or a few local municipal entities, as brick an mortar stores do, but rather to, potentially, over 9000. This is not fair, and fraught with issues.

Consider cost and complexity. Imagine if a small brick and mortar souvenir store in Vermont had to determine the residency of each and every customer who bought anything, and then pay sales tax not just to Vermont, but to the states and cities where the customers reside. Nuts, huh. We’ll that’s what lawmakers want online retailers to do.

They say that software is available to make this simpler than it sounds. But, A) that software isn’t free. And B) it doesn’t account for unintended (or intentional) errors. What happens, when a Vermont based on-line seller receives a bill from, I don’t know, Salt Lake City, Utah, saying that the company owes that municipality, say, $138 in unpaid sales tax – erroneously. And another similar bill from Anchorage, Alaska? And so on and so on. How much will it cost in time and treasure to fight such errors? How much would it cost to just pay them? This would be a nightmare.

So, the fair solution to this issue is to treat on-line retailers the way we treat brick and mortar stores – pay the sales tax to the state/municipality where the seller is located.

If I decide I want a pair of L.L. Bean boots, and I get in my car and drive to their outlet store in Maine, I pay Maine sales tax on the purchase. So, if I get on line to buy those same boots from that same store, it makes sense that I should pay the Maine sales tax, not the Vermont sales tax. Similarly, if someone from Maine orders an Orvis fishing vest, they should pay the Vermont sales tax, and not Maine’s.

This would genuinely put on-line and brick and mortar stores on an equal playing field, and it would allow states to raise revenue from the sales tax in an increasingly digital age, and it would benefit taxpayers in that states would  compete to be the home to online businesses by offering lower sales tax environments.

Rob Roper is president of the Ethan Allen Institute.

{ 13 comments… read them below or add one }

gerald masterson April 18, 2018 at 3:36 pm

Good idea, but the supreme court should only be discussing the merits of how it is being done now and not making law as to how it should be done

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Shazzam April 18, 2018 at 9:41 pm

The bigger question regarding the LL Bean example, is the constitutionality of VT taxing the individual who made their purchase in NH.

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William Hays April 28, 2018 at 7:00 pm

Sorry, L. L. Bean. ~98% of the products in your latest catalog are imported. I no longer give you my custom.

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Will Angier April 20, 2018 at 9:41 pm

Or… we could REALLY level the playing field by getting rid of sales tax all together. I know, I know, pipe dream.

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Deanne April 20, 2018 at 11:39 pm

A tangle indeed. Although I disagree with sales tax (and live in a state which does not collect it), I wonder …. constitutionally, is this something the federal government has jurisdiction to deal with or should this be dealt with on the state level, (ignoring for the moment the question of whether or not sales tax should exist)?

I don’t recall hearing this suggestion before, but my first reaction is that it makes sense (in the current tax climate).

There are many things that bother me about sales tax. The unfair advantage of online businesses is just the latest.

Years ago I had a small (very small) business in Michigan – mainly food, but some other items that were taxable. When I discovered that half of the sales tax I was required to collect (at least there and at that time) was designated to be kept by the business collecting it, I was appalled. I hadn’t wanted to be a tax collector and I was so disgusted with the situation that I didn’t want to keep “my half” of their dirty money. I think I just turned it all in. And I never wanted to be in that position again – being forced to be a tax collector for a government I don’t respect.

How deep will the hole have to get before people wake up? And will it then be too deep to get back out?

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William Hays April 28, 2018 at 7:02 pm

I, now, live in a ‘sales tax free’ state (Montana). Love it!

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gdp April 21, 2018 at 9:58 am

One of the principal reasons for our Federal Constitution was the failure of the Confederation to restrain the individual states from impairing commerce through tax and tariff. Free commerce was seen as the lifeblood of our polity and a bulwark against arbitrary and overweening government intervention. That policy was protected via the dormant commerce clause doctrine until it was compromised by the Rehnquist court in its deference to the growing surge of government largesse in the 90s. We need to get back to healthy American governance which places the individual first, encouraging private judgment and personal morality without external restraints, as opposed to extolling state action with its consequence of public force and dependency. State taxation of interstate transaction is a throwback to a bygone era of abuse and corruption. It should not be encouraged, particularly by anyone associating with the freedoms Allen and his crowd so fiercely protected. The negligence of Vermont in its failure to govern according to founding and framing principles should not be suborned or sustained by allowing it to exploit interstate commerce to fuel its exhausting choice of socialist delusion. And the Institute should not be suborning the growing debacle of state insolvency.

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Rep. Jean O"Sullivan April 21, 2018 at 1:39 pm

Vermonters are frugal. There are a lot more of them shopping on line and saving 6% than folks are buying from our Vermont on line retailers. Our brick and mortar stores have to compete at a 6% disadvantage. The tax department estimates it will bring in 1.8 million through their recent mailing telling Vermonters to declare their sales taxes due from internet shopping. Amazon remits to us now. If the Supreme Court rules in our favor, software packages will be available nationwide at competitive prices.
This is one way to cut property taxes. This will support our shop keepers and grow the economy; the other way we cut property taxes.

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Rob April 21, 2018 at 2:54 pm

Rep. O’Sullivan, I hear your points. But what happens to a Vermont online retailer who receives incorrect tax assessments from even a handful of the over 9000 municipalities they will have to collect and remit to? The costs to fight or pay could be crippling. And why, if this is the requirement for online retailers, should brick and mortar stores not be subject to the same requirement to collect and remit sales taxes to the home municipality of the customer rather than the business — they can use the same “simple” software to figure all that out. That would be a truly equal playing field.

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William Hays April 28, 2018 at 7:05 pm

Although I have a grand niece, working for Amazon, and making MEGA bucks, I eschew giving them my custom.

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Terry Williams April 23, 2018 at 1:48 pm

To Rep Jean O’Sullivan’s Point – It’s also another way to make frugal Vermonters go to New Hampshire (and even New York) to buy goods and gas. The Vermont government is penny wise and pound foolish and most Vermont citizens are going to go where they can get the best deal, and there will be nothing that our governor can do about. It’s kinda like enacting more gun control laws that they aren’t going to be able to enforce. Nothing from nothing is nothing…

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Deanne April 25, 2018 at 5:18 am

Although I don’t live in Vermont, I feel compelled to comment on the statement by the Vermont representative that “this is one way to cut property taxes.” That is a pipe dream. From my observations of our current governments (federal and states), taxes are not cut. Government bureaucrats are always happy to find new ways to spend as much money as they can collect, and more.

Although I detest the high property taxes in New Hampshire, the one consolation is that it is harder for the government to raise taxes a little here (income tax), a little there (sales tax), and some more here (property tax). It is hard to hide taxes here because it all comes as a property tax with numbers on a page that can’t be camouflaged. (I am not defending property tax, but at least it’s all in one place and out in the open, except that every purchase we make includes a “hidden tax” to pay every retailer’s or business owner’s property taxes as well.)

Anyway, the point here is that from what I see across the river (which is no different from any other government as far as I can tell), Vermont won’t reduce property taxes if they get more sales tax revenue. There are undoubtedly many government people who are waiting like hawks to spend the hoped-for windfall.

I’ve just been reading some about the Vermonter, Calvin Coolidge. Now there’s a Vermonter who would be likely to cut taxes and spending. Are there any more like him left?

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William Hays April 28, 2018 at 7:07 pm

John Calvin Coolidge, Jr. is my favorite, by far, president!

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