Online Sales Taxes Done Right

As is often true in Washington, there is vast agreement across the political spectrum that sales tax on online purchases should be remitted – the debate begins, however, when we start to discuss how exactly to go about that. 

In February 2013, both the House and Senate put forth a strong piece of legislation, the Marketplace Fairness Act, that shifts power from the federal government to the states, allowing local lawmakers to have web retailers selling products in their jurisdictions collect sales taxes – just like our Main Street shops already do.

Under current policy, online retailers are not required to collect sales and use taxes owed on purchases, giving them a government-mandated 10 percent price advantage in some cases over retailers that sell behind a storefront.

As a result, independently-owned brick-and-mortar retailers, who are at the heart of our local communities, face significant repercussions – the effects of which ripple throughout the entire economy. Thousands of local jobs have already been cut and countless others will be jeopardized if the sales tax disparity continues.

With this understanding, Sens. Mike Enzi (R-WY) and Richard Durbin (D-IL) as well as Rep. Steve Womack (R-AR) put forth the Marketplace Fairness Act based on a so-called “destination-based sourcing rule.” In other words, online consumers will pay the sales tax that is due in the area where they reside. This ensures they have a political voice in the state to which they pay sales tax and the opportunity to benefit from the services those taxes fund.

Some opponents to the legislation favor an alternate “origin-based sourcing rule,” meaning the customer would pay the sales tax due in the online retailer’s state of operation. While it may seem like an obscure detail, this is a case where the distinction makes the difference.

More specifically, it comes down to an American adage: Taxation with representation.

Origin-based sourcing may make sense if online retailers were paying the sales tax. But sales taxes are levied on consumers, not vendors; sellers are simply used as collectors of these taxes. With this understanding, the Marketplace Fairness Act properly provides necessary political safeguards for the ultimate taxpayer, the consumer.

A destination-based sourcing rule provides an indispensable check on state legislators. If politicians are able to increase duties on out-of-state taxpayers who aren’t able to vote them out of office or offer any form of political recourse, as would be true through an origin-based model, there’s a pretty good chance we’ll see sales tax growth for online products.

Most of us can agree that a sale is a sale. Whether you purchase a book online or at your local bookstore, the same tax rules should apply.

The Marketplace Fairness Act is a workable solution that finally levels the playing field for small businesses and empowers states to collect the taxes that are already owed. For states like Montana, New Hampshire, Delaware, and Oregon that currently have no sales tax, nothing will change. For those that do have a sales tax, states will merely be empowered to have online retailers collect the existing sales tax from consumers at the time of purchase, like our local retailers do.

Most importantly, the Marketplace Fairness Act makes these reforms in a way that puts the ultimate taxpayer first, protecting individuals, empowering consumers, and encouraging economic growth.

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