Online Sales Tax Bill a Small-Business Killing Tax Hike


The Wall Street Journal editorial board was entirely correct yesterday when they said, “Republicans have spent the last year cutting taxes and regulations, which hasn’t been easy. But now some Members of Congress want to blunt their handiwork by passing an online sales tax. Yes, they actually believe this would be good policy and politics.”

Despite the talk of possibly attaching it to must-pass funding legislation and the rhetoric about the bill itself, consumers will experience the Remote Transactions Parity Act (RTPA) as a sales tax increase. If the bill becomes law, more of their purchases will be subject to sales taxes and the downward pressure on sales taxes among states will be reduced, so rates and bases in all the states are likely to go up in the longer term.

Right now, sales taxes are only assessed on purchases when the seller has a physical presence—like a warehouse, store, or office—in the buyer’s state. This is because the seller is the legal taxpayer, so the status quo is a ‘no taxation without representation’ situation, not a special loophole set up for Internet retailers, as is sometimes claimed.

The RTPA seeks to get rid of that physical presence limit on state taxing powers. It would let states reach outside their geographical borders and compel another state’s business to calculate, collect, and remit to that first state. The cost of that tax will usually be passed along to the customer and will feel like a tax increase to consumers.

Additionally, the long-term effect is that this arrangement will lessen the downward pressure on taxes between jurisdictions. Think of it like this: it’s the difference between driving your car across the D.C. border to Virginia to fill up with lower Virginia gas taxes—that’s how it works now and that’s what keeps at least some downward pressure on D.C. tax rates. If D.C. made the rate high enough, everyone would exit and fill up in Virginia. But if approach in the RTPA is applied to this thought experiment, it would mean that when you pull into that Virginia gas station, they look at your D.C. plates and charge you the D.C. gas tax rate. There’s no exit. Consumers will wear their home jurisdiction like a tax albatross when they shop online. 

The RTPA is the opposite of tax competition; it’s a makeshift tax cartel amongst the states.

There is also a heavy regulatory compliance burden. Under the RTPA, businesses will be left calculating for thousands of distinct sales tax jurisdictions, each with their own bases, rates, exemptions, and tax holidays. These distinct jurisdictions and their rules will hurt small independent sellers and those who use platforms like Etsy and eBay. RTPA advocates point to free government-provided tax-calculating software as a way to ameliorate these compliance burdens. But there are serious concerns with the performance of that software and there are no allowances made in the bill for costs associated with testing or integrating these systems. 

These small businesses and independent sellers would also be subject to audits from up to 46 states (the current number of states that impose a sales tax) and could be hauled into the auditing state’s court. The costs associated with that are potentially lethal for a one-person shop selling on eBay or Etsy.

In an environment like that, many small firms would fold and some would be pushed on to bigger platforms, like Amazon, that will handle the tax issues for them—for a fee, of course. This ability to comply with onerous tax law, along with Amazon’s new business model of fast delivery—which requires warehouses that trigger sales taxes—explains Amazon’s support for RTPA.

In summary, the RTPA is a small-business killer—which is why big box retailers support it. It crushes small competitors with compliance costs. State politicians are for it because they’d rather tax sellers in other states who can’t vote them out of office. 

Consumers will be left with less money in their pockets and fewer choices online.

>> See also this week’s Web Memo, “Online Sales Taxes Make Government Bigger and Undermine Federalism: A Primer on Leading Internet Sales Tax Proposals and their Political Prospects.”