IF TRUTH-IN-LABELING rules applied to Congress, the proposed law giving states the power to collect sales tax from out-of-state online retailers would be named the Marketplace Unfairness Act.
Sponsored by Senator Mike Enzi, a Wyoming Republican, and fast-tracked to the Senate floor this week, the legislation would strip away protections that have been in place for decades, unleashing tax-hungry states on merchants they aren't answerable to and tilting the playing field against small Internet retailers.
Under existing law, any state can require businesses within its borders to collect sales taxes from their customers. That applies to shops on Main Street as well as to vendors doing business by mail and over the Internet. If you're a seller physically operating within the Commonwealth of Massachusetts, for example, part of your job is to collect the requisite Massachusetts tax each time you ring up a sale in the state. At the same time, you can't be conscripted into serving as a tax collector for states to which you have no physical connection. The Supreme Court has repeatedly affirmed that merchants must have a "substantial nexus" with a state – such as offices, a warehouse, or a sales force – before they can be compelled to collect taxes on that state's behalf.
In practice this means that a brick-and-mortar retailer only has to calculate the sales tax charged by its own state. A bookstore at the Cape Cod Mall collects the Massachusetts sales tax of 6.25 percent; it makes no difference whether the customer at the cash register lives across the street or across the country. Online and mail-order retailers play by the same rules: If they have a physical presence in Massachusetts, they're responsible for any sales tax payable to Massachusetts. Neither traditional retailers nor Internet retailers are obliged to collect taxes for states they don't operate in. Fair's fair.