Online Sales Tax: Norquist vs. Laffer and Other Bedfellow Battles

By now you’ve probably heard that the U.S. Senate is close to approving a bill that would allow the states to collect the sales taxes already owed by shoppers who make purchases over the Internet.  Currently, sales tax enforcement as it relates to online shopping is a messy patchwork, with retailers only collecting the tax when they have a store, warehouse, headquarters, or other “physical presence” located in the same state as the shopper.  In all other cases, shoppers are required to pay the tax directly to the state, but few do so in practice.  The result of this arrangement is both unfair (since the same item is taxed differently depending on the type of merchant selling it) and inefficient (since shoppers are given an incentive to shop online rather than locally).

Unsurprisingly, two of the strongest proponents of a federal solution to this problem have been traditional “brick and mortar” retailers that compete with online merchants and state lawmakers struggling to balance their states’ budgets even as sales tax revenues are eroded by online shopping.  But this issue has also turned anti-tax advocates, states without sales taxes, and even online retailers against one another in surprising ways, for reasons of ideology and self interest. 

Ideological Frenemies, Norquist and Laffer

Supply-side economist Arthur Laffer recently argued in the pages of the Wall Street Journal that states should be allowed to enforce their sales taxes on online shopping as a basic matter of fairness, so that “all retailers would be treated equally under state law.”  We completely agree with this point, but Laffer makes clear that his larger aim is to shore up state sales taxes in order to make cuts to his least favorite tax—the personal income tax. It’s no secret that Laffer wants states to shift toward a tax system that leans heavily on regressive sales taxes, but it’s harder to advocate for such a shift if the tax can be easily avoided by shopping online.

Grover Norquist of Americans for Tax Reform stands in direct opposition to Laffer on this issue.  Norquist has been “making the case on the House side of either seriously amending it or even stopping” federal efforts to allow for online sales tax enforcement.  But Norquist reveals his fundamental misunderstanding of the issue when he argues that out-of-state retailers should be free from having to collect sales taxes because “you should only be taxing people who can vote for you or against you.”  In reality, retailers aren’t being taxed at all—they’re simply being required to do their part in making sure their customers are paying the sales taxes already owed on their purchases.

Delaware vs. The Other No-Sales-Tax States

Four states levy no broad-based sales tax at either the state or local level: Delaware, Montana, New Hampshire, and Oregon and Senators from these last three states are generally not interested to helping other states enforce their sales tax laws. After all, why vote for a “new tax” if there’s no direct benefit to their own states’ coffers?

But Delaware’s senators see the issue differently, as both Sen. Carper and Sen. Coons voted in favor of the bill.  In fact, Carper introduced his own bill for collecting tax on e-purchases years ago, explaining it this way: “The Internet is undermining Delaware’s unique status” because “part of Delaware’s attraction to tourists is that people can come and shop until they drop and never have to pay a dime of sales tax.”

Amazon vs. Other Internet Retailers

It shouldn’t come as a surprise that online retailers as a group have opposed legal requirements that their customers pay sales taxes on their purchases since it means these e-retailers would have to charge and collect that tax.  Some companies, however, like Netflix, have long collected (PDF) those sales taxes, even without a legal requirement to do so. But most have clung to online sales tax evasion as a way to undercut traditional retailers by up to 10 percent (or more, depending on the sales tax rate levied where the buyer is located).

One recent exception is eBay, which appears to have seen the writing on the wall and has pivoted from opposing the bill to watering it down – and it’s deploying its 40 million users as an army of online lobbyists to that end.

But it is Amazon that stands apart from other online retailers in fully supporting a federal solution to the patchwork of state laws and the growing number of deals it has finally had to strike with states. The company’s reason is likely two-fold.

First, Amazon has a “physical presence” in a growing number of states and plans to continue its expansion in order to make next-day-delivery a reality for more of its customers. As a result, Amazon will be legally required to remit sales taxes in more states in the future and will find itself at a competitive disadvantage if other online retailers remain free from sales tax collection requirements.  Second, Amazon processes a large number of sales for other merchants through its website and collects sales taxes on behalf of some of them – for a fee.  Amazon’s sales tax collection services could become much more lucrative in the future if more of the merchants it partners with are required to collect sales taxes.