The online sales tax debate has often been reduced to a battle between brick-and-mortar retailers and out-of-state online or catalog sellers (collectively, remote sellers), with the big box retailers falsely accusing remote sellers of undercutting “Main Street” by getting around collecting sales tax. That erroneous argument has helped divide the retail business community while inspiring states to place onerous new tax collection obligations on small- and mid-size sellers.
The true “Main Street” retailers (namely, “mom & pop” stores) and remote sellers actually have more in common than state lawmakers would have them think. In fact, new sales tax collection laws percolating in the states threaten both online-only businesses and brick-and-mortar retailers who rely on online sales to help pay the rent.
While recent studies have shown that paying sales tax is becoming less and less a concern in online purchase decisions, complying with sales tax collection requirements could prove make-or-break for many out-of-state online and catalog retailers. Despite longstanding Supreme Court precedent barring states from taxing businesses outside their physical borders, several states – including South Dakota, Alabama, and Tennessee – have either passed, or are considering, new sales tax collection mandates on out-of-state businesses using dubious “economic nexus” arguments. Without a political voice to contest these state laws, out-of-state sellers are being threatened with taxation and regulation without representation.
If other states follow suit, businesses could end up facing a patchwork of new regulations from more than 10,000 different tax jurisdictions and the threat of audits and legal jeopardy from 46 state auditors. While large online sellers and big-box stores may be able to absorb the costs of compliance – and some already are because of their physical presence in many states – small- to mid-sized retailers that don’t have an army of accountants could be crushed by state rules and regulations.
Until recently, Washington hasn’t offered much relief for businesses that are suddenly facing audits from states in which they have no presence. Two bills currently under consideration — the Marketplace Fairness Act (MFA) and Remote Transactions Parity Act (RTPA) — would expose businesses to unprecedented audit risks. What’s more, MFA and RTPA allow states to retain their conflicting and complex sales tax rules.
But there is hope for a truly fair system for all retailers. Instead of requiring remote catalog and online retailers to follow thousands of tax jurisdictions around the country where their customers live, House Judiciary Committee Chairman Bob Goodlatte (R-Va.) has begun circulating a new discussion draft proposing that sales tax collection be driven by the location of the seller at a single state rate determined by the location of the purchaser. Tax on remote sales would be collected, but sellers would file and face audits only from states where they have a physical presence. This would be vastly simpler than the complex, confusing and unfair MFA and RTPA alternatives favored by some tax collectors and big box retailers. It also greatly simplifies compliance as remote sellers will apply their home state definitions and tax rules to every transaction regardless of where the purchaser is physically located.
With consumers eager to shop online or through catalogs and businesses offering more shopping alternatives, many of the current bills in statehouses and Washington are a threat to the health of our retail economy. We need a national solution that doesn’t pit businesses against each other, but instead creates a simple and level playing field for all retailers and one that is consistent with the bedrock principles upon which our country was founded that there should be no taxation or undue regulation without representation.
Retailers should come together behind the Judiciary Committee’s simple and fair proposal to ensure that states and localities are not allowed to impose a patchwork of impossible burdens on businesses outside their borders. However, if retailers remain at odds over the best way forward, then states will be allowed to run roughshod over all businesses regardless of where they are located and how they reach their customers.
Hamilton Davison is both the co-founder of TruST (True Simplification of Taxation coalition) and the president of the American Catalog Mailers Association.
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