For years, many brick-and-mortar businesses, as well as many governors, have pushed for the imposition of sales taxes on Internet-based companies. Last week, they got help from the Senate, including 26 Republicans:

An Internet sales tax is inching its way closer to being the law of the land: The U.S. Senate supported a non-binding vote of approval, 75-to-24, for a law that would allow states to collect taxes from Internet retailers. If enacted as is, it would allow states to levy taxes on some online retail purchases from businesses with over $1 million in gross receipts.

Many conservatives, such as Daniel Horowitz at Red State, are calling this a tax increase:

In theory, online retailers should function no differently than their brick and mortar counterparts.  An online retailer based in California should collect sales taxes from its costumers on behalf of California.  However, because the consumers are the ones who owe the tax, not the retailers, online retail companies would be forced to collect taxes for other states.  The Supreme Court has already ruled in Quill v. North Dakota that an individual state has no power to directly tax or compel tax collection of citizens of other states.  A business must be physically located in a state in order for that state to require it to collect sales taxes on the state’s behalf.  This 1992 decision took place long before e-commerce became a factor in the economy.

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Let’s first acknowledge that far from crushing mom and pop shops, the internet has actually leveled the playing field for them….As for collecting taxes, there is no good way of collecting e-commerce sales taxes across state lines without growing government, creating even worse market distortions, and hurting low-tax red states.

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To the extent that the status quo gives an advantage to online vendors, the MFA would overcorrect the problem and hurt online vendors.  While brick and mortar stores are forced to collect taxes from everyone, they are only subject to the tax of their home state.  So if they are located in a state with no sales tax or a low tax they collect the lower tax, even if the customer is from a high tax state.  Under the MFA, online vendors in a state like New Hampshire would still have to collect the high rate of taxes of customers from California.  So red-state companies will have to serve as tax collector for high-taxed blue states, thereby obviating the benefit of being in a red state and blurring the effectiveness of laboratories of democracy.

The Supreme Court case in question took place in 1992, and placed limits on sales taxes for businesses with smaller interests in states:

Internet retailers can thank their mostly tax-free existence to a 1992 Supreme Court Case, Quill Corp. v. North Dakota, which declared that companies without a “substantial nexus” in a state didn’t have to pay sales tax. “Quill became a seminal case for online retailers: It meant, in essence, that they didn’t have to pay state and local sales taxes,” writes the Washington Post’s Ezra Klein.” That’s allowed them to undercut traditional brick-and-mortar stores on price. It’s also meant that state and local governments, which rely heavily on sales taxes, have lost enormous amounts of revenue as more and more commerce has moved online.”

There are some exceptions: Amazon currently charges California residents sales tax, and will soon charge residents of Massachusetts and Connecticut, after new offices and acquisitions gave it a significant presence in those states.

At first glance, this seems like a tax increase. Yet, as noted by CNET, it merely gives states the authority to tax. No tax increases are included in the legislation.

So what’s the story? Did 26 Republicans vote to increase taxes? I reached out to Senator Mike Enzi’s (R-WY) spokesman Dan Head for his perspective – Senator Enzi is one of two sponsors of the Marketplace Fairness Act, the legislative version of the amendment in question.

According to Head, the Senator sponsored the legislation because “states are missing out on basic revenue. The economy has changed a lot in the past 20 years, and Senator Enzi does not believe the federal government should favor one business over another or one taxpayer over another.”

When I asked about new taxes, Head emphasized that no taxes were included:

This is not a new tax. This is an existing tax. I live in Virginia. When I buy online, Virginia sales tax applies. I am supposed to remit that on my income tax forms, which nobody does.

The Court case in 1992 ruled North Dakota does not have the authority to tax in the way it wanted, not because it was unconstitutional, but because Congress had not given it that authority. This applies to catalog retailers and other non-online out-of-state businesses as well.

If this does not become law, we – Congress and the American people – are endorsing a situation under which state and local governments are going to have to raise taxes to offset this loss of revenue.

Head also pointed out the Senate amendment “is non-binding. You can’t attach a binding amendment to a budget resolution. It simply means a majority of Senators support that position. It’s a matter of principle, not law.”

Finally, Head defended the amendment and legislation against accusations that Internet sales taxes would hurt small businesses:

Some people say this will hurt small businesses. However, the Marketplace Fairness Act would require states to provide businesses the software at zero cost to the businesses. Additionally, it only taxes businesses that do $1 million in sales online, so it’s not targeting small businesses at all.

This bill is 100% optional. This opens the door for a conversation between constituents, states, and local governments.

In a discussion with another Senate aide in a different office, I was told that another concern by supporters of the amendment is that lowering sales tax rates is difficult without a broader base, which is especially relevant with more businesses going online. As such, it is thought that the increasingly small number of businesses that are brick-and-mortar will find themselves more highly taxed as Internet businesses get off with a lower tax rate.

A third Senate aide took the opposite position – namely, the Act and amendment are bad policy. First, the aide pointed out that asking businesses to collect taxes in other states is problematic for many reasons, including how laws would have to be changed to adjust. Second, what about buying overseas? Should a business in America pay Singapore’s tax rates? That would require whole treaties to decide.

Finally, the aide noted Internet businesses don’t have the same “contract” with states that brick-and-mortar businesses do. They are not using the roads, fire stations, police resources, etc. in the same way. Thus, taxing them at the same rate as businesses with physical locations is unfair.

In the end, I was still left with a few questions:

  1. Why don’t supporters of the Act and amendment simply apply existing law instead of giving greater authority to states to raise taxes?
  2. If the Act becomes law, will the federal remittance “nobody does” be eliminated as law, to make sure double taxation doesn’t happen?
  3. Why can’t states lower spending, instead of raising taxes? And regarding the “conversation” within states, do Senator Enzi and others truly think most states aren’t going to utilize this ability to garner new revenue?
  4. How much will these forthcoming higher taxes hurt the economy?
  5. Are there other ways to create this “fairness?” From what I can see, Horowitz admits Internet businesses have some advantages tax-wise, but then fails to offer a solution. Do opponents of the amendment and Marketplace Fairness Act think there is a solution that balances the need for lower taxes with the need to have equality in the tax code? And do supporters think there is a better way to go than opening up the state spigot to higher taxes?

Until these questions can be answered – and because our heavily indebted governments have such a bad track record with “new revenue” – any new authority to raise taxes should be suspect.