Collect Sales Taxes Based On Store's Location, Not Customer's

By Adam Millsap of Mercatus.

"First, contrary to what South Dakota and others say, requiring web retailers to collect taxes from jurisdictions where they aren’t located would not put them on equal footing with physical stores. In fact, it does the opposite.

When I visit my parents in Ohio and go to a local store, nobody asks where I live in order to collect taxes. They charge me the local sales tax rate, not the rate I would pay at home in Tallahassee. I pay it, and the tax dollars stay in Ohio. If equal treatment is the goal, and we make web retailers collect and remit sales taxes based on customers’ locations, we should require physical retailers to do the same.

Which brings us to the second reason. We don’t require this of physical retailers because it’s costly and cumbersome. It would be a pain for physical stores to record the home locations of every customer they serve, collect the appropriate tax, and then remit it back to the customer’s home state and town. This process isn’t any less of a burden just because a purchase is made online.

Because of their extensive physical footprints, large retailers with online sales such as Amazon, Wal-Mart, Best-Buy, and many others already collect sales taxes in most or every state due to the nexus rules established by the 1992 court case. What overturning the current rule would really do is make small, mom-and-pop type online retailers located in one state bear the high costs of implementing a system that could appropriately collect and remit sales taxes to the thousands of jurisdictions around the country. Meanwhile, the physical mom-and-pop stores only need to collect sales taxes for the jurisdictions they’re located in, even if customers from all over the country walk in and buy from them.

How is that equal treatment?

A less costly, cumbersome, and fair plan is to require both online and physical retailers to collect sales taxes based on the taxing jurisdictions they are located in. This “origin-based” tax system would treat the shopping activity of tourists and online shoppers the same, and it would impose the same tax-collecting costs on physical and web-retailers.

Finally, there is a subtler reason as to why it doesn’t make sense for web retailers to collect and remit sales taxes based on customers’ home locations. Absent from all the chatter about how to levy sales taxes is a discussion about why we have taxes in the first place. Taxes exist to pay for collective goods and services that, for one reason or another, may not be provided or would be underprovided if we didn’t compel people to contribute via taxation.

Thus, in any discussion of how to levy taxes, we should also keep in mind what goods or services the tax dollars provide. Sales taxes are levied by state and local governments to provide things such as infrastructure, police protection, fire protection, and parks. Whether sales tax dollars should be remitted to the customer’s jurisdiction or the seller’s jurisdiction depends in part on which goods and services the tax dollars should be funding.

Regarding sales at brick-and-mortar stores, some of the sales tax should support the police officers and firefighters that protect the physical stores from theft and fire, as well as the local roads, water pipes, and sewage infrastructure that make shopping there possible. Alternatively, one might argue that some of the money should be remitted back to a customer’s home jurisdiction, since without tax dollars there may be no money to fund the roads that allowed the out-of-town shopper to reach the store.

But even if you accept that argument, it’s clear that the public goods at the store’s location play a larger role in facilitating in-store purchases than those at the customer’s home. Thus, most of the sales tax dollars should remain in the store’s jurisdiction. The same reasoning applies to online shopping, and the same conclusion holds.

Since there is currently no agreed-upon method to decide exactly what portion of sales tax dollars should go to the store’s jurisdiction versus the customers’, and because the largest portion should clearly go to the store’s jurisdiction, the status quo isn’t all that bad: Require both physical and online retailers to collect sales taxes based on their location.

Not only is this simple, low cost, and consistent with what we already do, but it’s also the appropriate thing to do from a public goods standpoint."