Republicans in Ohio last week took an important step toward broad tax reform when the state House of Representatives approved an across-the-board reduction in the personal income tax. That tax cut, however, is contingent upon Congress passing legislation that will allow Ohio and other states to have online-only retailers remit state sales tax just like any other business does. The U.S. Senate is now poised to grant states this power via the aptly named Marketplace Fairness Act. This legislation levels the economic playing field by putting small businesses on the same footing as online-only outfits. Conservatives should embrace this needed reform.
Under the current system, state governments collect sales tax from stores located in the jurisdictions if an outlet conducts an in-person sale or makes a transaction online with a state resident. When an individual makes an online purchase from a retailer outside their state, that person is supposed to report the purchase and pay the sales tax—commonly called a “use tax”—to his or her home state. As one might imagine, taxpayers rarely adhere to the requirements of use taxes.
The nationwide increase in online shopping has thus led to a sharp decline in sales tax compliance for state governments. States, which are legally forced to balance their budgets, have made up their revenue shortfalls through a mix of spending cuts, increasing marginal income tax rates and hiking other taxes or fees. The lack of a mechanism to have remote sellers collect and remit sales tax ultimately hurts small local business owners while increasing the overall tax burden on individuals and families who now pay for the higher taxes in other areas. This policy essentially amounts to a federal subsidy for online-only retailers and it threatens the creation of jobs for many local businesses.
The Marketplace Fairness Act is Congress’ answer to a 1992 Supreme Court ruling that said states needed federal approval to have remote retailers remit sales tax the same way local retailers do. This legislation allows states to correct the tax imbalance and divide the burden they impose on their residents more sensibly. With the recovery of lost sales tax revenues, states will be able to reduce marginal income tax rates and other levies as they balance their budgets. Naysayers argue that this will not be done, but they are already being proven wrong.