The Senate is advancing a bill sponsored by Mike Enzi (R-WY) that would require Internet retailers to charge sales taxes based on the buyer’s jurisdiction of residency. The objective is to escape a Supreme Court 1992 decision in Quill Corp. v. North Dakota that prohibited North Dakota from forcing an out-of-state seller to remit sales taxes.
Much of the talk on both sides of this issue has been about “leveling the playing field.” Thinking about this carefully shows that there are different ways the playing field might be leveled, each of which would be tilted in one way or another. There is no way to “level the playing field” on every important policy dimension, which suggests that it is past time to abandon this metaphor.
S. 743 would establish an interstate compact called that “Streamlined Sales and Use Tax Agreement.” Subject to certain conditions, States that choose to be Members would be authorized to require all sellers not qualifying for a “small seller exception” to collect and remit sales and use taxes to that Member State. It would “level the playing field” between brick-and-mortar retailers (who now must charge sales tax to all customers residing within the seller’s State) and Internet retailers (who generally do not). But it cannot do this much unless transactions costs from State sales tax compliance are zero.
And these transactions costs are not zero, so retailers would face a substantially tilted playing field with respect to compliance costs. Brick-and-mortar retailers would still have only one tax jurisdiction’s rates to apply to one list of taxable and nontaxable goods and services. S. 743 would require Internet retailers (what the bill calls “remote sellers”) to apply thousands of different tax rates and lists of taxable/nontaxable goods and services, and file thousands of different sales and use tax returns. To some extent these transactions costs could be reduced through computer software, but S. 743 would not make this software free. Thus, by “leveling the playing field” in one dimension, S. 743 would tilt rather substantially along a different one.
S. 743 also would establish an alternative for States that choose not to join the interstate compact. However, it would not allow nonparticipating States to “level the playing field” by charging the same sales tax on all transactions regardless of whether the sale is consummated remotely or in person. Currently, a buyer’s State of residence is generally irrelevant with respect to in-person purchases, though there are important exceptions such as motor vehicles. (This can be done efficiently because States make their residents pay in-State sales taxes as a condition of registration.)
There are other routine purchases in which one’s State of residence is irrelevant to whether a tax is applied. Think of taxes on rental cars and hotel/motel rooms; whether one is a resident of New York or Oregon has no bearing on whether one must pay New York’s car rental tax or hotel/motel tax. These taxes are widely (and generally correctly) viewed as taxes on nonresidents, which New York confirms by exempting those who stay in a single establishment at least 90 consecutive days (“permanent residents”). Still, these taxes are applied in a generally nondiscriminatory manner irrespective of the traveler’s State of residence.
Why doesn’t S. 743 allow States to charge the same sales tax irrespective of whether the purchase is consummated remotely or in person? Sen. Enzi’s Wyoming might benefit from that rule if a disproportionate share of its retail sales are made remotely. States with low sales taxes would become magnets attracting Internet businesses, and these States might enjoy greater tax revenue as a result. It is not obvious that a high tax rate on residents generates more revenue than a low tax on everyone.
And to be clear, while this alternative not in S. 743 would “level the playing field” with respect to retailers’ transactions costs, it would tilt the States’ playing field even further in favor of States with low sales tax rates. Given that the purpose of the bill is to raise State sales tax revenue, it should not be surprising that States supporting S. 743 do so in part because it would reduce interstate tax competition.