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Internet taxation: Fair or foul?
Consumers beware as Senate pushes tax on online sales
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As a general rule, whenever one hears members of Congress talking about “fairness,” you should hold on tight to your wallet.

That’s certainly the case with the proposed “Marketplace Fairness Act,” which has been under consideration in the Senate. The bill is aimed at leveling the sales-tax playing field between Internet merchants and so-called brick-and-mortar retailers.

Supporters argue that simple fairness demands the changes. But that fairness will come at a high cost to online businesses and American consumers. Congress should click the “delete” button on this ill-advised proposal.

The ongoing debate over Internet sales taxes actually has little to do with the Internet. Rather, it is a debate over the proper reach of state tax collectors. It has its roots in a 1992 Supreme Court case regarding a distinctly pre-Internet business: mail-order catalogs.

The state of North Dakota had sued an office-supply company called Quill, arguing that the firm should have been collecting sales taxes from North Dakotans buying items through Quill’s mail-order business. Quill had no stores, warehouses or staff in North Dakota, but the state argued that the retailer had to collect the prairie states’ sales taxes anyway.

The Supreme Court soundly rejected North Dakota’s claims, ruling that unless a firm has some physical presence, or nexus, within the state, North Dakota couldn’t require Quill to collect its taxes.

At the time, the decision hardly seemed monumental, attracting the attention only of a few mail-order junkies. But the principle it established became critical to electronic commerce in the Internet age. Internet sellers could not be required to collect taxes unless they had some physical connection to the taxing state.

The legislation now pending in Congress would overturn Quill Corp. vs. North Dakota and open up e-commerce providers to mandates imposed by tax authorities in other states. The argument for such tax mandates is temptingly simple. Why, argue supporters, should old-fashioned physical stores pay sales taxes while their competitors in cyberspace get off scot-and tax-free? The rule is unfair, some non-digital retailers argue, favoring one type of business over another.

Their argument is not without merit. Ideally, taxes should not distort the marketplace. But it this case, the proposed solution — allowing state tax collectors to force remote merchants to collect their taxes — would do more harm than good.

First, the idea that Internet retailers are exempt from taxation is false. In fact, 17 of the 20 largest Internet vendors pay taxes in 46 or more states. Many of these, such as Staples and Office Depot, have extensive brick-and — mortar operations nationwide, making their sales fully taxable. And the biggest e-commerce player,, is collecting taxes for a growing number of states, as it builds out a network of warehouses nationwide.

Of course, that stills leaves thousands of nexus-less Internet retailers who don’t collect out-of-state taxes. But forcing them to do so would come at a cost. Most obviously, expanded tax collection would provide a windfall to state treasuries, increasing consumer costs by billions.

But that’s only the start. Collecting and keeping track of payments for the 9,600 some sales tax jurisdictions in the U.S. would be a significant burden for smaller vendors, even with the help of computer programs. And the prospect of tax audits from the 45 states with sales taxes would be even more daunting. Moreover, vendors in the five states without sales taxes would be forced to collect for the states that do levy sales tax.

There’s also a potential cost in lost privacy, as vender collect and store residence and purchase data on their customers.

If states wish to impose such costs on their retailers, that’s their prerogative. States can regulate businesses within their borders. But the Marketplace Fairness Act would allow states to regulate the businesses of other states. Retailers would be subject to edicts and mandates from states with which they have no connection. And because they have no connection, state politicians would have little reason to worry about the effect of their taxes on the retailers.

Economically, the costs — ranging from job losses to reduced investment — resulting from the burdens imposed on retailers would be borne by the home state, not the taxing state. And politically, there would be little reason for out-of-state politicians to care, as the owners and employees wouldn’t vote in the taxing states elections.

This is the sort of harm the Founders — and the Supreme Court in Quill — feared. By abandoning the protections of federalism, we’re all left worse off. Congress should not open the gates to that dangerous path — even in the name of fairness.

James Gattuso is Senior Research Fellow in Regulatory Policy at The Heritage Foundation, 214 Massachusetts Ave. NE, Washington, DC 20002;