Democracy & Technology Blog Tax online sales?

For years state and local officials have claimed that online sales will erode the sales tax since online merchants are only required to collect sales taxes in jurisdictions where they have a physical presence. The tax collectors are gearing up to pressure Congress once again to change the status quo (“Main Street Fairness Act,” H.R. 5660).
Why are some online purchases but not others exempt from sales tax? For one thing, the compliance burden would be ugly. The Supreme Court observed (Quill Corp. v. N. Dak., 504 U.S. 298 (1992)) that requiring out-of-state merchants to collect the applicable state and local tax on all purchases regardless of physical presence might “unduly burden interstate commerce” since there were 6,000-plus taxing jurisdictions with their own variations in rates of tax, in allowable exemptions and in administrative and record keeping requirements.
For another, state and local tax collectors are not helpless. Consumers are already required to pay a “use” tax on out-of-state purchases, but most consumers don’t bother. State and local leaders have made only modest efforts to educate taxpayers and collect the taxes — apparently the potential revenues aren’t worth the effort.
As an aside, if the collection of use taxes entails additional cost, maybe that will give state and local leaders something to consider when they evaluate whether to jack their sales tax rates. Higher sales taxes may encourage more online commerce.
In any event, it turns out that taxing all online sales could generate only $8.6 billion in state and local revenues, according to the National Conference of State Legislatures. If that sounds like a lot of money, consider that according to the Census Bureau state and local government collected more than $1.2 trillion from all tax sources in 2009, including more than $282 billion from sales taxes.
Uncollected sales and use taxes from online commerce are a drop in the bucket. Otherwise, state and local tax collectors would be trying harder to collect them. Since they already have tools to exploit this source of revenue, Congress has better things to do than enact the “Main Street Fairness Act” and similar proposals.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.