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June 7, 2013

E-sales Tax No Bargain

By

Gov. Bob McDonnell’s transportation plan includes a unique provision. If Congress passes the Marketplace Fairness Act, Virginia would use the new revenue from Internet sales taxes for transportation projects, sparing Virginians an increase of the gas tax.

A respite from higher gas taxes sounds good. But Virginia’s businesses will pay a hefty compliance toll if the bill becomes law. And Virginians who shop online will pay the tab that drivers would’ve paid had the bill not become law.

Under long-established law, states can require businesses to collect sales taxes only if they have some sort of physical presence in the state — a store, warehouse or plant, for example. No buildings or staff in the state? No mandate to collect sales tax. That’s why, if you buy Florida oranges from an online retailer with no store in Virginia, the business doesn’t charge you a sales tax.

Supporters of the legislation want this system overturned so that states could require out-of-state online sellers to collect their sales tax. This would allow states to apply their sales tax collection laws and regulations to businesses with no connection to those states — other than customers.

This amounts to regulation without representation because it would give states and localities the right to expand their legal authority beyond their borders — a serious violation of the concept of federalism.

Supporters of the bill argue it would level the playing field between online retailers that don’t have to collect taxes on out-of-state sales and brick-and-mortar sellers that have to collect taxes on all sales. Granted, taxes shouldn’t favor one type of seller over another. But the bill, far from leveling the playing field, would tilt it steeply against small online businesses.

Brick-and-mortar stores would still be required to collect the sales taxes only in the jurisdictions where they are physically located. Online retailers would have to collect for as many as 10,000 different state and local sales tax jurisdictions — wherever their customers live. That is anything but fair. And it could be a real headache for small online businesses.

An online retailer in Richmond selling college paraphernalia to Richmond Spiders, Virginia Cavaliers and Virginia Tech Hokies fans across the country would be on the hook for collecting the sales tax where each customer lives. That would not be an easy task for a small business.

That regulatory burden could cost small online retailers big-time. Computer software may ease the burden somewhat, but it wouldn’t eliminate it altogether. Moreover, the new requirement would leave the small business with the daunting prospect of having to undergo separate audits from each of the 46 states that impose sales taxes. Audits cost firms a great deal of time and money — even when they uncover no discrepancies.

Proponents of the bill often argue that consumers don’t pay sales tax on online purchases. But that is false. In fact, Amazon, Walmart and almost all the other large Internet vendors pay state sales taxes because they already have warehouses, administrative offices or some other physical presence in virtually every state.

But lawmakers in sales-tax states, unfortunately including Virginia, are anxious to jettison the long-standing physical presence standard. They want to get their hands on the cash from every online sale possible, no matter how problematic that is for the little guys and gals selling online.

Virginia needs to update its transportation infrastructure, but it doesn’t need to raise taxes dramatically to do so. Unfortunately, rather than look for areas of the budget that could be cut so that those funds could be redirected toward the more pressing transportation problems, state lawmakers have, in part, banked on Washington to extend Virginia’s legal taxing authority out of state. In return, they are willing to subject Virginia’s online businesses to the regulations of 10,000 tax jurisdictions and audits from 45 other states.

The U.S. Senate has already passed the bill, with both Virginia senators voting “yea.” But it may be a different story in the more tax-increase-averse House. Overtaxed consumers and overregulated business owners tend to have a way of making life very disagreeable for lawmakers who ignore their concerns.

First Appeared in Roanoke Times.

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