Many people maintain that if Congress enacts The Marketplace and Internet Tax Fairness Act (MITFA) then buyers will end up paying more taxes to states. They also mistakenly represent that out-of-state retailers would become responsible for paying sales and use tax, and the process of calculations and remittances would overly burden small businesses. All of these statements are misleading, and attempt to guide intended beneficiaries away from the real benefits of MITFA.
Let’s address the second misrepresentation first. Retailers don’t pay sales taxes. Consumers do. Currently brick-and-mortar and a handful of online retailers do need to collect the sales taxes that are due from buyers and remit those monies to the appropriate jurisdictions. In the case of locally made purchases, retailers collect sales and use taxes from consumers at the point-of-sale. These consumers typically live, work, and shop within the same tax jurisdictions. Taxes on out-of-state purchases are not currently being collected and remitted automatically despite States’ rights to charge those taxes.
So, yes, if Congress enacts MITFA, consumers would pay evaded taxes on their out-of-state purchases. However, such a statement only represents a partial truth because most consumers currently evade remitting their tax obligations on out-of-state Internet purchases to a tune of conservatively $23 billion a year, based on a 2009 University of Tennessee Study, and many are numb to the fact they are actually paying higher alternative state taxes and fees enacted over the past decade to counteract their evasive choices. Instead, consumers in an ideal world would simply honor their tax obligations on out-of state purchases allowing current legislation to simply enact a policy shift streamlining sales tax collection and remittance for everyone.
Clearly there are great sums of un-collected sales tax dollars at stake, whether remaining unpaid or ultimately collected by states. But for a moment let’s agree to remove the financial component from the discussion, and proceed assuming that consumers are actually honorably paying all taxes due, ideally eliminating sales and use tax deficits. In this ideal world, consumers dutifully keep track of every one of their out-of-state and online purchases, calculating taxes due, and mailing the required payments when filing their state tax returns, as required by law in most states going as far back as 1930. Really, this is an onerous burden and is rarely undertaken by consumers, even if they are aware of their legal obligation to do so, which many are not.
Likewise, tracking such calculations and remittances are perceived burdensome for out-of-state retailers, as upheld by the Supreme Court in its 1992 decision in Quill Corporation v. North Dakota. Simply put, the Supreme Court determined the systems and procedures available for tracking and processing out-of-state taxes, in 1992, were unequal to the task, and thus collecting taxes from remote buyers posed an undue burden for out-of-state merchants. But, it is important to note that the 1992 ruling focuses on the burden of payment and collection, rather than on the obligation for payment and collection.
However, much has changed in the 22 years since the Quill decision. As in any marketplace, shifting economic conditions, new innovative technologies, and exponentially expanding interstate sales volumes continue increasing the demand for more efficient technologies including sales tax processing. And lo and behold, there are now innovative companies providing numerous technologies to enable businesses of any size to easily calculate, collect, and remit sales taxes due for any jurisdiction in any state in the nation. And what is more, many of those new sales tax-processing technologies—some even free to use–easily integrate with existing shopping carts and checkout platforms eliminating costly enterprise software solutions, and fully automate sales tax processing.
So in our ideal world, those current tax-paying consumers and tax collecting businesses can now rejoice since innovation easily eliminates onerous legacy sales and use tax requirements from their lives. Furthermore, innovative technologies hold the prospect for actually driving down prices since they fully automate sales tax processing, reducing costly legacy administrative burdens for consumers, businesses and states, freeing labor for additional income generating activities, creating innovation and restoring fair competition.
But, previously burdened consumers and businesses, now steadfast supporters, are not the only ones who will benefit. States also get to celebrate since they are now empowered to receive those previously evaded tax dollars that they can use to fund programs and services in continual demand by their constituents’ ballot initiatives. And by collecting tax payments on out-of-state sales, states can reconsider and eliminate tax and fee increases imposed on their residents over the last decade that were created to compensate for the shortfalls of evaded out-of-state sales taxes. In addition, equal distribution of tax burdens will lower individual taxpayers’ burdens.
In other words, in the two decades since the Supreme Court’s Quill decision, the free market can now supply innovative products to meet the demand for the efficient collection and remittance of interstate taxes. The old inefficiencies of the legacy systems are now replaced, bringing us closer to that ideal world.
So now, let’s leave the notion of an ideal world and return to today and the evaded $23 billion. Those missing tax dollars have gone unpaid because the burden behind collecting and remitting them was too high. That is no longer the case as the free market system of supply and demand has met that challenge. Thus, the only obstacle standing between that ideal world and us is the outdated Quill decision. And contrary to any argument, the Supreme Court noted that Congress is free, by an affirmative exercise of its power under the Commerce Clause, to change that rule. It is high time that Congress moves forward immediately by enacting the Marketplace and Internet Tax Fairness Act before the end of 2014.