Think Tank Fellow: Taxing At Place Of Origin Is The Best Method

Starved for cash, cities in Oklahoma and across the nation are looking to new sources of revenue. Their latest target? The Internet. Municipal officials are turning to the Marketplace Fairness Act (MFA) to fill budget gaps. While their hope is understandable, their faith is misplaced.

The bill, now before Congress, would subject Sooner State businesses to taxes and regulation in other states. It will hurt online and mail order businesses and set a dangerous precedent for taxpayers.

Today, sales tax is applied to online and mail order purchases when the seller has a physical presence, like an office or warehouse, in the consumers’ home state. This is the principle of “no taxation without representation” in action, for it is the seller that remits the sales tax and is accountable in audits.

The current arrangement was affirmed in a 1992 Supreme Court decision, Quill v. North Dakota, which found that requiring out-of-state businesses to remit sales taxes violated the U.S. Constitution’s Commerce Clause.

The MFA, in effect, seeks to overturn Quill. It would give state tax collectors unprecedented authority to collect taxes from companies completely outside their jurisdictions. For example, an Oklahoma business selling products through a website to a resident of California would be responsible for calculating and remitting sales tax to California tax authorities.

Retailers would have to comply with nearly 10,000 distinct taxing jurisdictions across the country. Even with the calculating software that proponents of the MFA promise to provide, businesses with $1 million in annual revenue would incur a cost of 15 cents on every dollar.

Furthermore, a recent study found that this “free” software would cost midsized online and catalog retailers (those with between $5 million and $50 million in annual sales) between $80,000 and $290,000 in setup and integration costs and an additional $57,500 to $260,000 in system maintenance and audits.

By merely selling a product to a customer in a different state, an Oklahoma business would become subject to the customer state’s audit process. Theoretically, a small firm with physical presence in only Oklahoma could be subject to audits from 46 taxing states and more than 550 tribal organizations.

Online retailers that choose to locate in Oklahoma for its low tax and pro-growth environment will lose that advantage.

Instead, they will be subjected to the tax policies of states where they have no political voice and receive none of the services their taxes fund.

If MFA proponents are serious about creating a “level playing field,” they should advocate for an origin-based system instead. This would make all purchases, regardless of method — whether online, by catalogue or over the phone — taxed at the point of purchase, just like in physical stores.

An origin-based approach would treat all retailers the same and preserve collecting authorities’ accountability to taxpayers.

States should never be allowed to export their regulatory and tax regimes beyond their geographical boundaries. Oklahomans should insist on physical presence to trigger taxation, and draw the line at the state border.