Internet Sales Tax a Virtual Nightmare

Call it the "click-it tax." The U.S. Senate voted 74-20 on Monday to consider a bill that would allow each state to tax Internet sales that originate in another state. That means the bill likely soon will clear the Senate. Authored by Sen. Michael Enzi, R-Wyo., the bill, S. 743, is grandly called the Marketplace Fairness Act.

According to laws dating back to the days of buying from catalogs, mail-order or Internet sales placed from other states can be taxed only if the seller has a physical "nexus," such as a building, in the buyer's state. But a seller of used books in New Hampshire, for example, doesn't have to pay South Dakota sales tax on a book purchased from your laptop in Pierre. As someone from South Dakota, you're supposed to send the sales tax to the state Franchise Tax Board; but few people do.

The argument in favor of the tax is that it corrects the unfairness to local retailers who have to pay sales tax while their out-of-state online competitors don't. The argument against is that Internet companies don't really benefit from a tax collected in another state.

A problem is that there are 9,500 state and local sales-tax jurisdictions in the U.S. that businesses, especially small ones, would have to comply with. Various uniform software solutions have been proposed.

But we're not confident in governments' computer prowess. After wasting $135 million of a $200 million budget to reform its computers, the California Department of Motor Vehicles in February halted a project to upgrade its 40-year-old computer system.

Local shipping companies delivering packages from other states also pay taxes on their salaries, trucks and buildings.

The Internet tax has divided both parties because five states don't have any state sales tax: Alaska, Montana, Delaware, New Hampshire and Oregon. They would be forced to set up state systems solely to collect money to be sent to other states.

Sen. Max Baucus, D-Mont., who often backs tax increases, opposes this one. "This bill forces small businesses across the country to spend time and resources they should be using to create jobs, jumping through new bureaucratic hoops," he said. "In Montana, it forces our small businesses to play tax collector for other states — with absolutely no benefit to them."

Thousands and thousands of small, home-based businesses would have to navigate those 9,500 taxing jurisdictions. Technology companies grow the fastest and create the most jobs when everyone enjoys what's called "frictionless capitalism." S. 743 would add a lot of "friction" by putting virtual sales-tax tollbooths around all 50 states.

In the House of Representatives, the bill is H.R. 684. We urge the members of the House to oppose this legislation.

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