In 1992, the U.S. Supreme Court ruled that states could not collect sales taxes from businesses that do not have physical locations within state borders. With the explosion of e-commerce since 1992, the National Governors Association claims that more than $20 billion in sales tax revenue is going uncollected each year because of tax-free Internet sales. The U.S. Senate is moving toward passage of legislation that would overturn the 1992 Supreme Court ruling, but whether this bill will actually pass both houses of Congress is very much an open question.
Last week, the Senate voted by a filibuster-proof majority of 63 to 30 to advance the bill, known as the Marketplace Fairness Act. Final Senate passage is expected next week. The bill would allow states to require all businesses selling online to consumers in their states to collect sales taxes and remit them to the state government. The only exemption would be for online merchants whose total annual sales to out-of-state customers are less than $1 million.
Rep. Peter Welch, D-Vt., is one of the Marketplace Fairness Act’s principal sponsors in the House, along with Rep. Steve Womack, R-Ark. The House bill has more than 50 cosponsors, roughly evenly divided between Democrats and Republicans. In spite of the bill’s bipartisan sponsorship, it may not even come up for a vote on the House floor.
Speaker John Boehner and Majority Leader Eric Cantor do not consider the bill a priority, in spite of vigorous lobbying of the House leadership by Republican governors whose states could use the revenues that would be collected under the bill’s provisions, and by retailers’ organizations concerned about online competition. Many Tea Party-oriented House Republicans will not vote for any tax bill, especially when Grover Norquist’s Americans for Tax Reform organization says that it will consider a vote in favor of taxing online sales as a violation of legislators’ anti-tax pledges.
Even if the Marketplace Fairness Act were to pass both houses of Congress, it may not be the panacea for brick-and-mortar businesses that many of its sponsors claim, although state governments would clearly benefit from the new revenue. Fiscal experts in Montpelier say that Vermont’s revenues would go up by about $20 million a year if all online sales were taxed. This amount would help considerably in closing the state’s persistent budget gaps.
Businesses on the eastern side of Vermont already face competition from tax-free New Hampshire, so their situation would not change even if more online sales were taxed. It is no surprise that downtowns in St. Johnsbury, White River Junction, Springfield, Brattleboro and other eastern Vermont communities are struggling, when thousands of Vermonters cross the Connecticut River daily to shop in tax-free Littleton, West Lebanon and Keene, N.H.
Away from the New Hampshire border, smaller businesses in Vermont may not benefit greatly from the removal of tax-free online sales. Even if online merchants were to collect the Vermont sales tax, many of them have such market power that their prices would continue to be lower than in brick-and-mortar stores, even with the sales tax advantage eliminated. Online merchants, especially those that have large warehouses located near FedEx and UPS distribution hubs, will continue to have advantages over small local merchants in terms of availability of products and the range of items offered.
If online sales were taxed, big-box stores in Chittenden County selling high-value electronics and other products might see an increase in sales. Fewer consumers would engage in comparison shopping in physical stores and then order merchandise online to avoid the sales tax.
Eric L. Davis is professor emeritus of political science at Middlebury College.