Online sales tax is not a tax increase: Five things to know

The Senate is close to passing a bill that would let states require online merchants to collect sales tax on their products. A few key myths about online sales tax, busted. 

The Senate is close to passing a bill that would let states require online and catalogue sellers to collect sales taxes on the products they sell. Congress has been struggling with this issue for decades, yet few disputes have generated as much confusion and misinformation as this one. To help separate myth from reality, here are five things you should know about what the Marketplace Fairness Act of 2013 does, and does not, do.

It is not a tax increase. In most states, if you buy a good or service subject to sales tax you already owe the tax whether you purchase online or in a store. The dispute is merely over who collects it. If you buy on Main Street or in the mall, the seller collects the tax and remits it to the state. If you buy online and the seller does not collect the tax, you still must pay an equivalent use tax when you file your state income tax return.

True, almost no one does this and states rarely enforce their use tax laws, but that’s not the point. Legally, you already owe the tax. Fundamentally, this is a matter of tax compliance, not tax levels.   

It is a back-door way for states to collect more tax revenue. While it isn’t a tax hike, it clearly will generate more revenue for states. But if you think taxes are too high or government is too big, then you should try to get states to lower or even repeal taxes. Indeed, making online sellers collect taxes ought to make it easier to lower tax rates.   

It is not an “Internet tax.” The bill does not give states the power to tax access to the Web, the cloud, or even securities transactions, as some fear. All sorts of interests have raised the specter of a digital camel sticking its nose under the tax tent. But there is nothing in the bill that gives state the authority to tax this other stuff. In fact, the bill’s Section 3 explicitly bars states from using the law to try to impose new levies on products or services that are not now taxed.

It will not complicate life for buyers. In fact, it will simplify their lives. Those few of us who pay the use tax will finally be able to throw away our receipts. And while today almost no one can keep track of what is taxable and what is not, the law encourages states to participate in a multistate effort to simplify sales taxes.   

It will not burden online sellers. The law exempts firms with less than $1 million in sales from collecting sales taxes. It requires states to provide sellers with the information they need to determine rates in multiple jurisdictions. It even requires states to give sellers free software to calculate the tax. And, if that isn’t enough, credit card companies and payment firms such as PayPal can easily do this at practically no additional cost. There may, in fact, be no tax that is easier to collect.

Remarkably, Congress has failed to solve this problem for nearly a half-century. The Supreme Court first recognized tax complexity problems for interstate sellers in 1967. In 1992, in a case called Quill v. North Dakota, the High Court practically begged Congress to sort out the mess. In 1999, Congress responded by doing what it often does when it doesn’t want to tackle a problem. It created a commission.

Finally, 21 years after Quill, the Senate may finally address the issue. It remains to be seen whether the  House, dominated by tax-phobes, will do the same. But after two decades, it is long past time for Congress to sort this out—and get past the myths that delayed action for so long.