2015-03-09 National Governors Association

Online Tax Parity

The Honorable John Boehner
Speaker of the House
United States House of Representatives
Washington, DC  20515

Dear Speaker Boehner:

Last month you received a letter from former Congressman Chris Cox in which he defends Chairman Bob Goodlatte’s proposal regarding states’ authority to collect sales taxes from out-of-state sellers. Given your desire to resolve this issue, I want to make sure you have all of the facts and know that their arguments are largely based on a misunderstanding of sales taxes.

As you know, sales taxes have traditionally been a primary source of revenue for state governments. The fundamental issue here is the increasing sales of goods and services on the Internet—sales that would be subject to sales taxes if purchased at a local business. Internet sales largely escape such taxation even though the taxes are due under most states’ “use tax” rules, making it fundamentally unfair for local businesses. As the sales on the Internet grow, so do both the harm to local business and the erosion of the sales tax base, promoting the use of income taxes and other revenues.

Chairman Goodlatte’s proposal, and Congressman Cox’s defense of it, suffers from a fundamental misunderstanding: Sales tax is a tax on consumers, not the businesses who collect it on behalf of states—just as the withholding of income taxes is a tax on employees, not the employers who collect it. Once you accept the view that a sales tax is paid by the consumer—hence its description as a “consumption tax”—most of their arguments fall away.

Under the chairman’s proposal, if a Virginian made an Internet purchase from a California firm, he would pay the tax of the state of origin for his Internet purchase. In other words, he would pay the higher California sales tax (collected by the California seller). Not only would the buyer pay taxes in a state in which he did not receive services and cannot vote (truly taxation without representation), he would see his tax bill go up. And because the higher tax rate would dissuade consumers from purchasing from California companies, those companies would have a strong incentive to move to lower or no–sales tax states, an incentive created by federal law.

In contrast, Congressman Jason Chaffetz has a draft bill that recognizes the consumer as the taxpayer and their home state as the legitimate taxing authority. Under this legislation, if a Virginian made an Internet purchase from a California firm, he would pay Virginia sales tax (also collected by the California seller) just as if he made the same purchase from a local store. This “destination” based system promotes competition by creating a level playing field for local brick-and-mortar stores and their Internet counterparts.

Congressman Cox also makes much of the use of “regular order.” There is much to be said for regular order when it is followed. Unfortunately the Marketplace Fairness Act (MFA), which passed the Senate early in 2013 with broad bipartisan support, was never seriously considered by the House Judiciary Committee. A hearing on the broad principles of the issue only further delayed potential action.

As you know, Mr. Speaker, the rules of the House and Senate provide a way to move forward when committees fail to act. For example, in the Senate it was necessary to move MFA directly to the floor without committee action. The bill was debated over several days and ultimately passed by a vote of 69-27; the committee’s failure to act clearly thwarted the will of the Senate.

State and local officials and the business community stand ready to support moving legislation through the House and Senate. We know changes will be made to the legislation, but the basic principles of federalism and the goals of collecting what is owed, avoiding new or higher taxes and leveling the playing field for all sellers must guide the process. States simply ask that you provide a chance at a real and open debate so that we can resolve the issue this year.

Sincerely,

Dan Crippen

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