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Opinion

Op-Ed: A not-so-taxing decision on Internet sales

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Opinion,Science and Technology,Op-Eds,Taxes

Is the Marketplace Fairness Act fair? To anti-tax advocates' chagrin, Democrats and Republicans have finally found something they agree on.

Next week, they'll likely pass a bill requiring online retailers to collect sales tax on their transactions with out-of-state customers. In this case, Congress is right -- and the fact that the GOP is on board could be a healthy sign that more conservative politicians are acting, well, conservative.

Thanks to a two-decade-old Supreme Court ruling, Internet retailers have enjoyed an advantage. They could sell people stuff without having to to collect -- and charge -- the sales state and local tax, up to 9.25 percent. Now Congress wants to close this loophole.

It is a loophole -- and it is unfair to offline stores. Worse, though, like all loopholes, it encourages bad behavior. Consumers actually already owe this tax -- but with nobody to collect it for them, they don't pay.

For Washington to ignore what amounts to $22 billion a year in tax noncompliance hardly says much for the rule of law.

The disparity encourages selective enforcement, too. Remember Dennis Kozlowski? The former Tyco CEO is in a New York prison for looting his company -- but the original case against him included an unusual charge of sales-tax evasion.

Kozlowski had bought paintings for his Manhattan apartment, but pretended to have them shipped to tax-free New Hampshire to avoid New York's sales tax (he paid a fine to get this charge dropped). Kozlowski's sin was just a more elaborate version of what commoners do every day.

The loophole also hinders states' freedom to levy the kind of taxes they see fit. The bill's stated purpose is to "restore states' sovereign rights to enforce State and local sales and use tax laws."

This is a noble goal. A state whose leaders prefer sales taxes to income taxes shouldn't face an unfair enforcement burden. (Many Western and Southern lawnmakers, including Republican Sen. Mike Enzi of Wyoming, have signed on partly for this reason.) Opponents of the bill have raised a wolf-crying argument: It's an unfair burden on small business. But software exists to help businesses collect tax by shipping ZIP code (and now states will have to provide it for free, itself unfair competition against private tax practitioners).

Plus, if you want to do business in a state, you should comply with that state's laws.

Indeed, the real problem with the bill is that it exempts companies with less than $1 million in sales. Why discriminate by size?

Opponents also note that sales-tax rates in many states are already too high.

Sure, but a laudable goal -- lower taxes -- doesn't justify all means. If tax rates in a congressman's state are too high, maybe he should run for state legislature instead and work to cut them.

Sanctioning mass-scale individual tax evasion is not the answer. In fact, ending that evasion may help. If affluent consumers can no longer wriggle out of the taxes they owe on big purchases, maybe they'll call for lower tax rates.

As usual, Congress isn't acting purely on principle.

Big retailers like Amazon.com no longer oppose the bill. That's partly because as they build warehouses around the country, they're subject to more states' taxes anyway, and partly because they've seen from recent anti-Starbucks protests in Britain that gaining a reputation as a tax shirker may be bad for business.

Tax-hungry states like New York and California, though, shouldn't be too thrilled. A jump in sales-tax revenue isn't going to solve their budget problems.

State deficits are driven by public-sector retirement benefit costs that eBay vendors aren't going to solve.

Nicole Gelinas is a contributing editor to the Manhattan Institute's City Journal. Follow her on Twitter @nicolegelinas.

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