Policy Documents

An “Original” Solution to Taxation of Online Sales

Andrew Moylan –
April 1, 2012

All across the country, legislators and businesses are under increasing pressure to confront issues arising from differences in sales tax collection obligations between traditional “brick-and-mortar” and “remote” retailers. A sales tax authority can only require a business to collect and remit its tax if that business has a legitimate physical presence in the state. The result is that online sellers, who have fewer physical locations across the country, only collect sales taxes under limited circumstances and the “use tax” that consumers technically owe in lieu of sales tax is virtually impossible to uniformly enforce.

Unfortunately, much of the response to this pressure has manifested itself in federal and state efforts to dismantle the important and long-established “physical presence standard,” which protects businesses and taxpayers from aggressive, overzealous revenue collectors. This vital safeguard is something that ALEC supports in the realm of sales and income taxes because it prevents other states from harassing your citizens and businesses. The good news is that there is a solution to help address perceived challenges with remote sales, while maintaining the strong taxpayer protection of the physical presence standard: Shift to an “origin-based” sourcing rule for sales taxes.

A destination-based sourcing rule requires businesses to collect sales tax defined by the physical location of the buyer, whereas an origin-based sourcing rule would require sales tax collection defined by the physical location of the seller. This subtle difference seems like little more than an obscure, boring technocratic change, but it would have the effect of dramatically altering the current debate while helping us tackle some of the most vexing issues in sales tax collection with a fiscally conservative approach.

The destination-based sourcing rule that many “tax fairness” advocates support for online sales require Internet companies to quiz their customers about their residence, look up in which of the nearly 10,000 separate taxing jurisdictions they reside, and then collect and remit taxes to that distant authority based on its own complex and ever-changing dictates. An origin-based sourcing rule, on the other hand, would require those companies to levy only one tax based on the laws of the jurisdiction in which their business is located.