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Bob Goodlatte’s internet tax bill is no solution

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(Read caption) A package from Amazon is seen in Manhattan.

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The other day, House Judiciary Committee Chair Bob Goodlatte (R-VA) proposed his latest version of a bill to clarify when and how states can impose sales taxes on online and catalogue sales. Congress has been at loggerheads over this issue since the Supreme Court practically begged lawmakers to sort it out—in 1992.

The consequences of Congress’s nearly 25 years of inaction have become more serious as online sales have grown to 8 percent of total retail sales. To add to the confusion, the Supreme Court revisited the issue in 2015 and opened the door to state action to require remote sellers to collect sales tax—a door that South Dakota and Alabama have already walked through.

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Goodlatte has proposed a draft solution. It is …odd.  He’s come up with a complicated hybrid, where tax on remote sales is collected by the state where the seller is located, the tax base is determined by the seller’s state, but the tax rate is established by the buyer’s.

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Still with me? I didn’t think so.

Let’s get into the weeds a bit more. Imagine a resident of New York buys a bottle of designer olive oil from a Chicago-based online seller, overpricedoliveoil.com.  Under Goodlatte’s proposal, the New York buyer would have to pay sales tax to Illinois because food is subject to tax in Illinois. A state would have to use the same tax base for remote sales as for local purchases.

What rate would the New York buyer pay? That would be up to the Empire State since Goodlatte would require each state to establish its own special sales tax rate for all remote purchases. The rate could not be higher than the combined state and local tax rate for other sales. Oh, and the rate would be based on the delivery address of the buyer, not the billing address.   

Such an origin-based system flies in the face of both common practice and good tax policy. While tax experts agree on very little, there is a general consensus that consumption taxes should be imposed at the location of the buyer, not the seller. And that’s how it’s already done when online retailers collect tax because have a physical presence in the consumer’s state or when they voluntarily collect tax.

One reason why such a design is favored by tax experts is that it reduces the opportunities for gaming. Here’s a good explanation of how from Oxford University’s Michael Devereux. Though his paper focuses on international taxes, the principle is the same.  

Goodlatte is not unaware of these problems. But his bill has to work very hard to try to prevent sellers from manipulating the law.

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For example, because the tax base is linked to the seller’s location, firms would have an incentive to set up shop in states that don’t tax their product. Overpricedoliveoil.com, for example, would be more likely to open up in Indiana, a state where food is tax exempt, than in Illinois, where it is taxable.

To prevent such gaming, Goodlatte’s bill tries to define the “origin locality” and “origin state” of the seller. Similarly, he needs rules to deal with buyers in states that have no sales tax. In a destination-based system, you don’t need to bother. You just treat remote sales the same way as brick-and-mortar purchases.

Lawmakers are deeply divided over state authority to tax remote sales. Most states, Main Street retailers, and now many national online sellers such as Amazon.com want a national solution. Some smaller online sellers don’t. And anti-tax conservatives insist a federal bill would result in a massive tax increase on consumers (a claim that ignores the fact that most states already require buyers to pay use tax on remote sales: The issue is who should collect the tax, not whether consumers owe it).

Goodlatte’s latest draft may revive discussions on the issue, which would be a good thing. But his hybrid model is no solution.       

This story originally appeared on TaxVox.


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