Michael Greve Testifies on Internet Sales Tax Issue

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Michael S. Greve cites CEI research in his testimony on Internet sales taxation before the U.S. Senate Committee on Finance.

Mr. Chairman, members of the Committee: thank you very much for giving me the opportunity to testify on the vexing question of interstate sales taxation.

The thrust of my testimony is that the Congress can and should harmonize the contending principles of federalism, economic efficiency, and tax equity. At first sight, that may seem impossible. The Governors’ insistence on the states’ rights seems to run headlong into remote sellers’ strenuous objections to being regulated by states with which they have no tangible connection. The e-commerce camp’s insistence on that position, in turn, conflicts with the principle of tax equity, championed vigorously by mainstreet retailers. And so on. Federalism, equity, and efficiency can be reconciled, however, by providing that interstate sales through whatever channel (direct, catalogue, or Internet) are subject to sales taxation at their point of origin, meaning the seller’s home state—not, as is currently the case, on the basis of their destination, meaning the customer’s home state. As a practical matter, that solution requires federal legislation.

I harbor no illusions about the political viability of adopting an origin-based approach, at least in the current round of legislation. While the proposal has been floated in the tax literature, in the publications of some think tanks (such as the Competitive Enterprise Institute, the Heritage Foundation, the Cato Institute, and—in an international context—the Progressive Policy Institute), and in some versions and applications before the Advisory Commission on Electronic Commerce, it has received little, if any, public and legislative debate and consideration, and time is running out. Alternative proposals under consideration, however, seem unattractive, unworkable, or both. Moreover, the choice between origin and destination as the basic regulatory principle has broad applications in other arenas—consumer privacy, for example, and especially the international trade matters under this Committee’s jurisdiction. In those arenas, the choice of the wrong jurisdictional principle—destination—would entail terrible consequences. In that light, I respectfully urge the Committee, and the Congress, to refrain from hasty e-tax legislation that might set a bad precedent and preclude a shift to origin-based taxation at a more opportune time.