NCPA - National Center for Policy Analysis

The Pitfalls of Internet Sales Tax Collection

February 18, 2013

As consumers flock to the internet for much of their consumer spending, traditional "brick-and-mortar" stores are losing market to "remote competitors." States are quick to point out that sales taxes are not collected on a vast majority of internet sales. Several different tax schemes have been proposed to generate revenue for states but all are riddled with inconsistencies, says Irene Switzer, a legislative assistant with the National Center for Policy Analysis.

  • Most consumers avoid paying online taxes due to the 1992 Supreme Court Quill v. North Dakota ruling that only forces a business to collect a sales tax if it has a physical presence in that state.
  • Most online retailers have limited locations, meaning the absence of physical presence creates a tax collection discrepancy that allows online retailers to sell products at lower prices than brick-and-mortar stores, which much collect sales taxes.
  • The National Conference of State Legislatures estimates this tax discrepancy will cost states $23 billion in avoided taxes in 2012.

The "use tax" is one proposed tax scheme that requires consumers to pay sales taxes to their state for all goods they purchase. This shifts the burden of paying the tax from business onto the consumers. Another possibility involves overturning the Quill decision, which would create an advantage for local retailers as online retailers would be responsible for deciphering and collecting taxes based on the almost 9,600 separate sales tax jurisdictions in the United States.

Some favor a destination-based tax rule that would have sellers collect taxes and pay them to the buyer's state. This tax scheme creates a two-tiered system that would subject business owners to the laws and tax rates of states where they do not reside. In order for this plan to work, Switzer says that uniform tax rates and streamlined collection systems would have to be implemented.

Others favor an origin-based taxation scheme where all transactions would be taxed according to the seller's location. This approach would create competition between high- and low-tax states.

Switzer notes that a consumption tax, such as a flat-rate income tax, would reach all consumption spending, whereas sales taxes reach only half of all consumption.

Source: Irene Switzer, "The Pitfalls of Internet Sales Tax Collection," National Center for Policy Analysis, February 15, 2013.


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