Online Sales Tax: Two Sides Of The Same Coin

Washington has begun debate on legislation known as the Marketplace Equity Act. This legislation has wide bipartisan support, including endorsements from some of the country’s most conservative governors.  Conservative members of the House and Senate like Rep. Steve King (R-Iowa) and Sen. Mike Enzi (R-Wyoming) have also voiced strong support.

What is the Marketplace Equity Act?

Depending on whom you ask, the legislation either levels the playing field between small businesses and corporate giants like Amazon, or it constitutes a new tax.

Under current law, small businesses on Main Street are required to collect and remit sales taxes while Internet giants like Amazon or eBay do not.  This disparity was created by a 1992 Supreme Court decision, Quill Corp. vs. North Dakota, which said states are not allowed to require out-of-state companies to collect sales taxes unless that company has a physical presence or “nexus” (such as a store) within the state.  The Marketplace Equity Act (S.1832) has been proposed to allow states to collect sales tax from online sales.

Supporters of the legislation argue that current law discriminates against small mom-and-pop businesses.  Retailers, state legislators, small businesses, and governors have formed a coalition to level the playing field.

Some organizations, particularly the Direct Marketing Association, oppose the legislation.  They argue that there are thousands of taxing authorities in the country — state, local, county — and it would be onerous to Internet companies to force them to collect taxes from all of them.

Two sides of the same coin, right? And therein lies the challenge.

The inequities of the current law are plainly evident. Current government policy forces price increases on one set of businesses but not on the other set of businesses. Functionally, this is government promoting one business over another. To ignore this disparity is to silently condone government manipulation of the marketplace.  Yet concerns have been raised about the specifics of the legislation being proposed.

Which begs the question: is there a middle ground? Jessica Melugin at the Competitive Enterprise Institute thinks there is. Ms. Melugin opposes the current legislation but acknowledges a legitimate need for sales tax reform. She proposes an origin based system—where purchases are taxed based on the location of the seller and not the purchaser– as an alternative.

This issue is certain to see more debate, and this legislation will see numerous revisions as it winds its way through Congress. But when it’s all said and done, hopefully, the solution will address both sides of the coin and result in policies that live up to the ideals that demand our government treat all Americans equally.

Photo Credit: 401K 2012 (Creative Commons)