Evolving marketplace forcing evolving tax policies

As Bob Dylan famously sang, “The times, they are a-changin.” Things that were mere props in science fiction flicks just a few years ago are now realities. Computers so small they fit in our pockets but so robust that they can search the entire World Wide Web and within a fraction of a second return an answer to just about any question you can dream up. Oh, and you can use it to call your grandmother too.

The rapid evolutions in consumer technologies have drastically improved the efficiency, if not the quality of our lives. Need to deposit a check? No need to drive to the bank. Just take a picture with your phone and the check is automatically deposited. Need to buy clothes, groceries, electronics, new car tires or a copy of the 1962 Yearbook for Bay View High School? No problem. Just about anything you need can be purchased online without ever changing out of your pajamas much less leaving the house. But as convenient as these advancements are for consumers, it often presents challenges for public policy to keep pace, adapt and apply to the new virtual world.

One such issue making news lately is the law governing the collection of sales taxes for online sales. Under current law only states where online stores have a nexus such as a physical location can require the collection of sales tax and then only for sales made to residents of that same state.

The percentage of retail sales made online are rapidly escalating. It is estimated that by 2015, online sales will reach nearly $300 billion--in the U.S. alone. Most cities, counties and states are funded largely by sales taxes. So as more and more revenue moves online, that means less and less revenue to fund things like police departments, fire departments and schools.

So it is little wonder that a coalition of Governors are supporting a bill in Congress to fix this. Introduced by Rep. Steve Womack from Arkansas (himself a former mayor), the bill would allow states to require online retailers to collect and remit sales tax on all sales.

Opponents of Womack’s bill have argued that the shear number of different tax jurisdictions in the U.S. make such a policy unworkable. They have also questioned the constitutional authority of a state like say Florida to require a business based in California to collect sales tax for them.

Others have floated what sounds like a more workable model known as the “origin based” model. Under this model, Internet consumers would pay the prevailing sales tax rate where the Internet store is located. So if you are buying shoes from an internet retailer located in Tallahatchie, you would pay whatever the sales tax rate is in Tallahatchie.

Few want to see the tax free status of the internet go away. And maybe states or counties can cut spending or find other funding mechanisms to fill out the gap. But sooner or later, adjustments will need to be made to reconcile the real world with the ever evolving virtual world.

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