• Howard Kline

CAN CONGRESS BE CONVINCED TO ALLOW STATES TO COLLECT TAX ON INTERNET SALES?

After the inevitable defeat of the Marketplace Fairness Act in the House of Representatives, (I was going to use the term, “ignominious”, but I looked it up online and found it’s definition to include humiliating and shameful to be inappropriate. It was just a defeat.), Congress is trying again to allow the taxation of internet sales with the new and improved bill, now called the Remote Transactions Parity Act. Isn’t that a catchy name? Wait, we can use the acronym “RPTA” so it sounds more like a municipal bus and transportation service and thus less harmful.



Image courtesy of SundayMorning at FreeDigitalPhotos.net

I apologize up front for describing RPTA as an attempt by congress to tax internet sales. My difficulty is that when trying to explain what some in congress are attempted to do, most people see this as, just another tax. Therein lies the root of the problem. Technically, the Marketplace Fairness Act and the RPTA were and are not attempts to tax internet sales. They are attempts to give teeth to each state’s attempts to tax internet sales transactions where the seller does not have a physical presence in the state where the purchaser resides. Many states already have, what is called a Use Tax that is typically imposed on the buyer in a sales transaction based upon the purchase price.  



Image courtesy of cooldesign] at FreeDigitalPhotos.net

The difficulty of this type of tax is actually collecting the tax for many internet purchases. Let me give some examples:


Assume that you live in Ohio.

  • You purchase a Camera online from Samy’s Camera located in California. Samy’s doesn’t have a store or distribution facility in Ohio and does not charge you Ohio sales tax on the transaction. Do you owe any tax on the purchase? The answer is yes. You owe a use tax to Ohio on the purchase price of the camera.  The problem for Ohio is that, unless you voluntarily report the purchase to the state of Ohio, the state has no way of knowing that you purchased the camera and thus would be unable to impose the use tax on you.

  • Let’s now assume that you just purchased online, that super, fuel efficient and really impressive Tesla. Assume for the purposes of this example, that Tesla doesn’t have any manufacturing, distribution, retail facilities or any other presence in the state of Ohio. When you purchase the car online, Tesla does not charge you sale tax. Do you owe taxes on the purchase? Again, the answer is yes. But the difference between this example and the camera example is that Ohio has a pretty easy way to know that you made the purchase and require you to pay your tax on the purchase. Unless you do not intend to register your car with the state, which is something that I do not recommend, upon registration, the Ohio Bureau of Motor Vehicles will collect the Use Tax upon registration.


Image source, Tesla Motors

To many however, my explanation is meaningless. To them, it is an attempt to tax because, from a practical perspective, if passed, it will take money out of their pocket and give it to the state on purchases that you make online that they now,  would not likely pay to the state.


There are and have been a number of trade organizations, including BOMA and ICSC that have strongly supported the Marketplace Fairness Act and now the RPTA. Their support for this type of legislation is rooted on fairness, at least as they see it for their members.  The logic is that if you impose the obligation on internet sellers to collect each state’s use tax on each transaction, internet sellers would not have a price advantage over brick and mortar retailers, who do have the obligation to collect sales tax.


Without arguing the relative arguments in favor or against this type of legislations, let’s take a look at how our trade organizations have tried to pass this legislation and what they might try in the future.


The groups supporting the ability of states to tax online retailers for purchases made by residents have consistently relied upon their direct lobbying efforts to convince congress to support the interests of retailers and the retail real estate community. These groups, have also consistently failed at their efforts.


They have been led and have relied upon professional lobby groups who, believe that, by their sheer influence as lobbyists, they can convince a conservative, Republican controlled legislature to allow each state to collect sales tax from sellers who make sales to residents of the taxing state, even though the sellers have no physical presence within the buyer’s state of residence. This is, in my opinion, an exercise in futility.


To be clear and despite the fact that it may be against my own personal interests (I won’t be able to buy tech without paying taxes), I favor the right and ability for states to tax interstate online sales to residents of their states. What I object to is the limited thinking and hubris exhibited by the groups that support the proposed legislation. If you want to get this done, do everything that is necessary to win. Einstein is quoted as saying, “Insanity is doing the same thing over and over again and expecting different results

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