by Mark TarsesShould internet retailers be required to collect sales tax on out-of-state sales? Under current Federal law, states cannot require internet retailers to collect sales tax on out-of-state sales unless the retailer has a physical presence in the state where the goods are being shipped.
In states with high sales tax rates, the owners of brick-and-mortar stores feel that internet retailers have an unfair competitive advantage over them, and it is easy to understand why they feel this way. A bookstore here in Berkeley, California, for example, has to collect 8.75% sales tax on everything they sell, but an out-of-state internet book seller doesn't have to collect sales tax at all. That doesn't seem fair.
Congressmen from states with high sales tax rates, (such as New York, Massachusetts, Mississippi, and California) are under a lot of pressure from retailers in their states to change the Federal law and allow states to tax internet sales. On the other hand, Congressmen from states with no sales tax (like Oregon and Montana) are happy with the current Federal law just as it is.
Should interstate sales be subject to sales tax? This debate has been going on a lot longer than you might think. It didn't begin with the internet. This debate began over 100 years ago with the rise of mail-order catalogs. As early as the 1880s, shopkeepers were complaining that Sears Roebuck and Montgomery Wards had an unfair advantage over them because they did not collect sales tax on out-of-state sales.
Why does Federal law exempt internet retailers from collecting sales tax? Many people like to believe that the reason is that the big internet retailers, like Amazon.com, pay lobbyists to get Congress to exempt themselves from taxation. While this explanation seems obvious and reasonable, it is not correct.
The problem isn't that Congress lacks the will to tax internet retailers. The problem is that they can't figure out how to do it.
First, there are over 30,000 seperate sales tax jurisdictions in the U.S. Here in Berkeley, the sales tax rate is 8.75%. But just 10 miles away (across San Francisco Bay), in Sausalito, the sales tax rate is 7.75%. Just here in California, there are over 50 different sales tax jurisdictions, each with its own sales tax rates. There is no way that any internet retailer could keep track of all these rates, much less fill out all tax forms for every sales tax jurisdiction in the U.S.
Second, not everything is subject to sales tax, and the rules governing what is taxable and what is exempt vary from state to state. For example, consider cough drops. Here in California, cough drops are exempt from sales tax if they require a prescription. If the cough drops do not require a prescription, they are taxable if they are "medicated", like Luden's Wild Cherry Cough Drops, unless they are being purchased for resale, in which case, they are exempt from sales tax. However, if the cough drops contain no medication, they are classified as candy, which is always exempt from sales tax in California. Is that clear? Well, no, it isn't. Other states have other rules for taxing cough drops. How could any internet retailer keep track of all the exemption rules in the U.S.?
Third, states do not want to give up their rights. The only practical way that internet retailers could collect sales tax is if there was a uniform national sales tax rate and uniform national rules on what to tax and what not to tax. However, states do not want to give up their right to control taxation policy. States with large numbers of Senior Citizens want prescription drugs to be exempt from sales tax. States that produce tobacco as their main crop want cigarettes to be exempt from sales tax or taxed at a very low rate. Some states tax newspapers and magazines. Other states don't, arguing that taxing newspapers and magazines is an infringement of freedom of the press.
Fourth, taxing internet sales wouldn't generate very much money anyway. Many things sold on the internet are exempt from sales tax everywhere. For example, the #1 item sold on the internet (measured in dollars) is airplane tickets; but airplane tickets are not subject to sales tax. Merchandise purchased for resale on the internet is another big dollar item, but that too is exempt from sales tax. Then there are items that can be ordered on the internet without paying sales tax, like hotel and auto rental reservations; but sales tax will be paid later anyway - when you check out of your hotel and return your rental car - so the states lose no tax revenue on that either.
If there was an easy and practical way to collect sales tax from internet retailers, Congress and the states would have figured out how to do it a long time ago. When politicians can't figure out a way to tax something, it is never for lack of trying!