Goodlatte: 7 Things to Consider Before Taxing Internet Shopping

James Gattuso / September 19, 2013

Rep. Bob Goodlatte (R-VA) (Tom Williams/CQ Roll Call/Newscom)

Efforts in Congress to give state tax collectors power to tax out-of-state (mostly Internet) sales hit a roadblock Wednesday, as House Judiciary Committee chairman Bob Goodlatte (R–VA) released seven principles to guide the debate. These principles reflect the major concerns with such an expansion of taxing power, rightfully setting a high bar to any such action.

However, the bill has stalled in the House, which has been more skeptical. Under current law, as set out by the Supreme Court, state tax collectors cannot require retailers to collect sales taxes for them unless that retailer has a “nexus,” or physical presence, in their state. Legislation to remove this limitation, S. 743, the Marketplace Fairness Act (MFA), was approved by the Senate earlier this year. The House has been skeptical, however. Goodlatte’s principles reflect that skepticism and articulate the many reasons for concern. Among them:

• “Tax Relief—Using the Internet should not create new or discriminatory taxes not faced in the offline world. Nor should any fresh precedent be created for other areas of interstate taxation by States.” There is little question that the proposed legislation is intended to provide taxing states with more revenue. Whether it is a “new” tax is a semantic question. Unless countervailing reductions are made elsewhere, taxpayers will pay more.
• “Tech Neutrality—Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses.” Supporters of expanded taxation argue that the current system disadvantages brick-and-mortar stores that compete with non-taxed Internet sales. But the proposed solution could create an even more unequal footing, with Internet-based retailers facing taxation from as many as 46 separate state tax authorities.
• “No Regulation Without Representation—Those who would bear state taxation, regulation and compliance burdens should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement.” The proposed MFA would clearly run afoul of this principle. Retailers would be subject to mandates, audits, and other requirements imposed by states in which they have no presence or political representation.
• “Simplicity—Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.” The MFA would require retailers to comply with some 10,000 state and local tax laws (plus those of U.S. territories and even Indian reservations), filing the necessary paperwork and remitting the proper amount for each. MFA proponents argue that today’s software makes this an easy task. But even with software, retailers still would face a significant burden, including handling claims by tax-exempt customers, fielding inquiries from tax authorities, and addressing the inevitable glitches.
• “Tax Competition—Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-à-vis their foreign competitors.” Even if tax collectors are allowed to require that their taxes are collected in every U.S. state, they would have no authority over non-U.S. retailers, driving sales to retailers abroad.
• “States’ Rights—States should be sovereign within their physical boundaries. In addition, the federal government should not mandate that States impose any sales tax compliance burdens.” Principles of federalism not only protect states from encroachment from the federal government, but also limit encroachments by other states. The MFA would violate these constraints, allowing one state to impose its laws in another.
• “Privacy Rights—Sensitive customer data must be protected.” To collect the proper taxes, information must be collected from the consumer, some of which will be transmitted to the taxing state. This would include the consumer’s location and possibly the items purchased. Adequate safeguards should be in place to ensure that such information, which may be sensitive, is kept confidential.

Chairman Goodlatte has been careful to indicate that these principles do not necessarily rule out legislation on Internet taxation. A plan consistent with these principles could still be considered. But so far, no such plan is in sight; certainly the Senate-passed MFA falls far short of the mark. And it’s not clear what, if any, plan would pass muster. But that’s not a legislative failure; it’s the way the system should work.