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From Slogans to Solutions: Doing the Real Work on Internet Taxes

It’s gonna take more than sloganeering and one-sided arguments to address the enormous challenge of reforming federal and state tax systems. That was the key message coming out of today’s Senate Finance Committee hearing on tax reform, and it’s one that advocates of the so-called “fairness” internet tax would do well to heed.

Committee Chair Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) did a good job of highlighting the insane complexity and uncertainty of current state and federal tax systems.  And Sen. Hatch also quoted a favorite slogan of his, reminding tax reformers to follow the Hippocratic principle, “First, do no harm”.

Internet sales tax proponents have plenty of their own slogans, too, as in “Fairness!” and “Level the Playing Field!”   But their solutions would harm millions of businesses who are using the internet to reach customers around the country, as they struggle to compete with the big-box chains that dominate local retail.  So much for the “fairness” slogan coming from billion-dollar retailers like Walmart and Target.

The Senators also pointed out the duty of Congress to require simple national frameworks for state taxes — before Congress sweeps aside judicial and constitutional restraints on states’ power to export their tax burdens.  Amen to that.

Streamlined Sales Tax Project has become just a slogan, not the simplified standard its backers claim.

But as I said in a statement for today’s hearing, state tax collectors have for a decade been struggling to deliver on their promise of a simple online tax regime.  Thing is, their Streamlined Sales Tax Project has become just a slogan, not the simplified standard its backers claim.

The truth is that potential state revenues and benefits for small retailers are grossly overstated. According to a study by economists Robert Litan and Jeffrey Eisenach, uncollected sales tax on e-commerce in 2012 is only 1/3 of one percent of total state and local tax revenue. (link to study)

With new internet taxes representing such a small impact on the very real revenue shortfalls facing states, one would think that advocates on both sides would see that it’s more important to get this issue right for generations of future online sellers and consumers, than it is to rush through a flawed solution rooted in a false sense of urgency.

But that may be too logical for Washington.

Internet tax proponents can see the finish line, and they’re not about to slow down for such trivial matters as fairness and effectiveness. And that’s a shame, because this is not an insoluble problem.

We had the opportunity to submit testimony for today’s hearing, where we propose a set of straightforward “simplification requirements” that would reduce the significant collection burdens that the current proposals pose to Internet sellers, and create something approaching a fair playing field.

Some of these requirements are slam-dunk simple, like requiring each state to have a single rate for remote sales, a single sourcing rule, and a single audit for all states.  Other requirements, like vendor compensation and legal means to challenge states that stray from simplification standards, may take a little more thought. Taken together however, these proposals lay out a roadmap for real simplification that protects online sellers, and the future of e-commerce.

For a Congress in search of serious solutions to lots of serious problems, we hope this can become a real start.