Jacob Sullum

At a 2008 shareholders meeting, Amazon founder and CEO Jeff Bezos explained why he opposed requiring businesses like his to collect state and local taxes on their interstate sales. "We're not actually benefiting from any services that those states provide locally," Bezos said, "so it's not fair that we should be obligated to be their tax collection agent."

Last year, Paul Misener, Amazon's vice president for global public policy, testified in favor of a bill allowing states to demand sales tax from online merchants, saying Congress should "level the playing field for all sellers." As that switcheroo suggests, there are plausible fairness arguments on both sides of this issue. And although there is a way to bridge the gap, it is not the route Congress seems intent on taking.

The Marketplace Fairness Act, which Congress is expected to approve soon, sounds like something out of an Ayn Rand novel. But it reflects understandable complaints from brick-and-mortar retailers who believe their online competitors have been enjoying an unfair advantage for way too long, thanks to Supreme Court rulings that bar a state from requiring a business to collect sales tax unless the company has a physical presence in that state.

Shoppers are still legally obligated to pay their state's sales tax on items they buy online, but few are aware of this notional requirement and even fewer comply with it. The upshot is that online sales are effectively tax-free, unless you happen to live in the same state where the merchant is located.

At the average combined state and local tax rate, the savings amount to about $9 on a $100 purchase. That's not a huge difference, but it helps online merchants (and hurts their offline competitors) to the extent that it makes people care less about shipping charges.

At the same time, companies with customers throughout the country are understandably worried about complying with the multifarious demands of the 9,000 or so jurisdictions that have the authority to impose sales taxes. That burden is less daunting to big companies like Amazon (which might even be said to enjoy an unfair advantage in that respect) than to their smaller competitors. In partial recognition of that reality, the Marketplace Fairness Act exempts merchants with less than $1 million in annual out-of-state revenue.

The bill seeks to reduce the compliance burden by requiring each state to offer free software allowing merchants to calculate sales tax and file a single return for all taxing authorities within the state. States could not audit a business more than once a year.

Jacob Sullum

Jacob Sullum is a senior editor at Reason magazine and a contributing columnist on Townhall.com.
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