Nobody likes paying taxes, but we understand they are necessary to pay for government services that we expect.
And a fundamental principle of taxation is that it should be fair. The West Virginia Governor’s Commission on Fair Taxation defines fairness among taxpayers to mean “each taxpayer receives impartial, equitable and consistent treatment.”
Currently, however, sales tax collections in West Virginia and across the country are unfair because of a gigantic loophole that is growing daily: Internet sales.
A 1992 U.S. Supreme Court decision (Quill corp. v. North Dakota) prohibits states from collecting sales tax from retailers that do not have a physical presence in their state. So, when you buy online from a company in another state, no sales tax is collected.
Technically, the buyer is supposed to voluntarily pay the tax in their home state, but no one does.
As a result, local brick-and-mortar businesses, which charge sales tax at the register, are at a price disadvantage to on-line retailers. Additionally, states are missing out on billions of dollars of revenue. West Virginia alone loses about $100 million a year from these uncollected sales taxes.
U.S. Senator Jay Rockefeller (D-WV), who is the Chairman of the Committee on Commerce, Science and Transportation, proposes closing the loophole by passing the Marketplace Fairness Act.
The legislation requires on-line retailers to collect sales tax on each purchase and send that money to the state where the sale originated.
“This debate is not about imposing new taxes,” Rockefeller said in testimony to the committee. “Instead, it’s just allowing states to collect taxes that are currently owed under existing law, but are being systematically avoided.”
On-line retailers are fighting the proposal.
They argue that with nearly 10,000 separate taxing jurisdictions in the country, having a system capable of collecting taxes for each one would be inordinately complicated and expensive.
It might be necessary to standardize and simplify all the different sales tax rates to make it workable. Or perhaps, as Rockefeller has suggested, the very technology that makes fast and efficient Internet sales possible can also be applied to the tax collections.
It’s wise to be careful here, however. If the various state sales taxes are unified and the collections automated it would be tempting for Washington to take its cut or tack on a little extra.
Still, the existing system discriminates against local businesses by putting them at a competitive pricing disadvantage. The government’s current inability to collect sales tax from on-line purchases amounts to a subsidy of those Internet businesses and violates the standard of impartiality that should apply to taxation.