Someday, the current dispute over whether to charge state and local taxes on Internet sales will look like a historical oddity — the relic of a strange time after it became possible for e-commerce sites to sell goods all over the country, but before state tax bureaucracies and private software companies developed the tools to make sales tax collection easy. Earlier this month, the US Senate passed legislation that would allow state and local governments to collect taxes on Internet sales to their residents. The House should follow suit, so the country can get on with recognizing that Internet sales, which once seemed so exotic, are just like other retail sales and should receive no particular legal preference.
The current sales tax exemption has two sources. The first is the belief that Internet commerce is such a fledgling business that any taxation threatens to kill it off. This argument no longer holds. Larger Internet retailers benefit from such economies of scale, and consumers have been so persuaded of their convenience, that these companies don’t need a major tax exemption to keep them in business.
The other main argument for the exemption is a 1992 Supreme Court decision relieving mail-order retailers of the obligation to collect taxes from states where they lacked a physical presence. The court concluded that forcing out-of-state retailers to collect taxes for thousands of separate jurisidictions would be a burden on interstate commerce; justices left it to Congress to decide whether to impose such a burden in the future.
What the court couldn’t know is that technology would make that job easier, and the Senate legislation will only accelerate that process. Under the measure, states that want to collect taxes on Internet purchases will have to simplify their collection process or provide tax assessment software for free. To further limit the difficulties of compliance, e-commerce sites that sell less than $1 million in goods to states where they have no physical presence will be exempt from paying taxes. This spares the artisans and specialty-product makers around New England who worry that the law would complicate their ability to market themselves through the Internet.
Opponents worry that these protections aren’t enough. They’ve raised the possibility that big, unaccountable state tax bureaucracies will still make life difficult for out-of-state merchants when disputes arise. (“Internet Sales Tax Passes — Tax Lawyers Get Ready to Go Boat Shopping,” read a headline in Wired.) To make sure that doesn’t happen, Congress will need to provide continuing oversight to make sure the law is implemented in a fair manner.
But as long as there’s money involved in doing so, states and private software companies will develop tools to get money into tax coffers in an efficient manner. As e-commerce companies themselves know well, advances in technology tend to make complex tasks easier over time.