The reauthorization of the Internet Tax Freedom Act, scheduled for later this month, will again reignite the acrimonious debate over Internet sales taxes. A majority of states, under the umbrella of the Streamlined Sales Tax Project (SSTP), are asking Congress to extend their tax collection authority to Internet and catalog sellers in states where the seller has no “nexus” (such as a store) that would permit the state to impose collection obligations. In Sell Globally, Tax Locally: Sales Tax Reform for the New Economy, AEI scholar Michael S. Greve categorically rejects that proposal and offers a provocative origin-based approach to sales taxation as an alternative to expanding the existing, deeply flawed sales tax regime.

Cross-border sales, through the Internet or other channels, are commonly taxed on the basis of their destination, not the country or state of origin. That regime is uniformly decried as terribly complex, burdensome, and inefficient. It allows many Internet sales to escape taxation, depriving governments of revenues and giving Internet retailers an unwarranted advantage over traditional industries.

The SSTP and many other e-commerce tax reform proposals attempt to solve that difficulty through tax harmonization and interstate cooperation. Greve rejects that option as unworkable--state and local governments will never be able to agree on a lasting harmonization of the tax base. Even if it could be made workable, it would remain deeply problematic. Drawing upon his extensive background in federalism issues, Greve argues that any destination-based state agreement will amount to the creation of a “tax cartel”--a system of mutual cooperation among states that is geared toward enforcing tax obligations. A tax cartel, however, would undercut the potential for tax competition among states that would create incentives to lower taxes. 

An origin-based tax system would break the tax cartel and replace it with tax competition--giving states an incentive to lower their sales taxes as a means of enticing companies to choose their state as a base of operations. Businesses located in low-tax states would be able to offer their consumers lower-priced goods and services, giving those businesses a competitive advantage.

Moreover, Greve explains, a destination-based sales tax system invariably conflicts with elementary principles of sensible taxation--simplicity, fairness, neutrality, and ease of administration. An origin-based system can do a better job of satisfying those demands. Each cross-border sale, through whatever channel, would be taxed equally, once, and by a single authority.

Sell Globally, Tax Locally concludes with practical proposals to forestall international tax harmonization and to advance an origin-based sales tax system in the United States.

Michael S. Greve is the John G. Searle Scholar and the Director of the Federalism Project at the American Enterprise Institute.