The Internet, Sales Taxes, and Tax Competition

This paper considers the economic implications of an internet sales tax and its effect on trade and competition between states.

With most state lawmakers facing large budget deficits, they have become more aggressive about collecting online sales taxes. And now, Congress is considering blessing a multistate compact that would permit states to impose such taxes on interstate commerce, ending a 15-year long debate. To that end, Senator Dick Durbin (D-IL) recently introduced S. 1452, “The Main Street Fairness Act,” which would force retailers to collect sales tax for states that join a formal tax compact.

Apart from getting chronic state overspending under control, a better solution to the states’ fiscal problems than a tax cartel that imposes burdensome tax collection obligations on out-of-state vendors would be tax competition. Congress should adopt an “origin-based” sourcing rule for any states seeking to impose sales tax collection obligations on interstate vendors. This rule would be in line with Constitutional protections for interstate commerce, allow for the continued growth of the digital economy, and ensure excessive, inefficient taxes do not burden companies and consumers.