Mike Segar/Reuters/File
A package from Amazon is seen in Manhattan.

Bob Goodlatte’s internet tax bill is no solution

House Judiciary Committee Chair Bob Goodlatte proposed his latest version of a bill to clarify when and how states can impose sales taxes on online and catalogue sales. It is … odd.

The other day, House Judiciary Committee Chair Bob Goodlatte (R-VA) proposed his latest version of a bill to clarify when and how states can impose sales taxes on online and catalogue sales. Congress has been at loggerheads over this issue since the Supreme Court practically begged lawmakers to sort it out—in 1992.

The consequences of Congress’s nearly 25 years of inaction have become more serious as online sales have grown to 8 percent of total retail sales. To add to the confusion, the Supreme Court revisited the issue in 2015 and opened the door to state action to require remote sellers to collect sales tax—a door that South Dakota and Alabama have already walked through.

Goodlatte has proposed a draft solution. It is …odd.  He’s come up with a complicated hybrid, where tax on remote sales is collected by the state where the seller is located, the tax base is determined by the seller’s state, but the tax rate is established by the buyer’s.

Still with me? I didn’t think so.

Let’s get into the weeds a bit more. Imagine a resident of New York buys a bottle of designer olive oil from a Chicago-based online seller, overpricedoliveoil.com.  Under Goodlatte’s proposal, the New York buyer would have to pay sales tax to Illinois because food is subject to tax in Illinois. A state would have to use the same tax base for remote sales as for local purchases.

What rate would the New York buyer pay? That would be up to the Empire State since Goodlatte would require each state to establish its own special sales tax rate for all remote purchases. The rate could not be higher than the combined state and local tax rate for other sales. Oh, and the rate would be based on the delivery address of the buyer, not the billing address.   

Such an origin-based system flies in the face of both common practice and good tax policy. While tax experts agree on very little, there is a general consensus that consumption taxes should be imposed at the location of the buyer, not the seller. And that’s how it’s already done when online retailers collect tax because have a physical presence in the consumer’s state or when they voluntarily collect tax.

One reason why such a design is favored by tax experts is that it reduces the opportunities for gaming. Here’s a good explanation of how from Oxford University’s Michael Devereux. Though his paper focuses on international taxes, the principle is the same.  

Goodlatte is not unaware of these problems. But his bill has to work very hard to try to prevent sellers from manipulating the law.

For example, because the tax base is linked to the seller’s location, firms would have an incentive to set up shop in states that don’t tax their product. Overpricedoliveoil.com, for example, would be more likely to open up in Indiana, a state where food is tax exempt, than in Illinois, where it is taxable.

To prevent such gaming, Goodlatte’s bill tries to define the “origin locality” and “origin state” of the seller. Similarly, he needs rules to deal with buyers in states that have no sales tax. In a destination-based system, you don’t need to bother. You just treat remote sales the same way as brick-and-mortar purchases.

Lawmakers are deeply divided over state authority to tax remote sales. Most states, Main Street retailers, and now many national online sellers such as Amazon.com want a national solution. Some smaller online sellers don’t. And anti-tax conservatives insist a federal bill would result in a massive tax increase on consumers (a claim that ignores the fact that most states already require buyers to pay use tax on remote sales: The issue is who should collect the tax, not whether consumers owe it).

Goodlatte’s latest draft may revive discussions on the issue, which would be a good thing. But his hybrid model is no solution.       

This story originally appeared on TaxVox.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Bob Goodlatte’s internet tax bill is no solution
Read this article in
QR Code to Subscription page
Start your subscription today