NGA Warns Boehner of Online Sales Tax 'Misunderstanding'

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WASHINGTON — The National Governors Association has written to House Speaker John Boehner to correct what it calls a "misunderstanding" underlying a recent draft online sales tax proposal made by House Judiciary Committee chair, Rep. Bob Goodlatte, R-Va.

NGA executive director Dan Crippen sent the letter to Boehner, R-Ohio, after Christopher Cox, a partner at Morgan, Lewis & Bockius and former congressman, wrote Boehner to defend, and urge support for, Goodlatte's draft proposal, which has been criticized by state and local groups and some Democrats.

The stakes for online sales tax legislation are high, as sales taxes have traditionally been a primary source of revenue for state and local governments. Internet sales have generally escaped such taxation even though the taxes are due under most states' "use tax" requirements, the NGA wrote. Consumers just don't pay them.

"As sales on the Internet grow, so do both the harm to local business and the erosion of the sales tax base, promoting the use of income taxes and other revenues," NGA's Crippen told Boehner.

Crippen said that "Goodlatte's proposal and … Cox's defense of it suffers from a fundamental misunderstanding: Sales tax is a tax on consumers, not the businesses who collect it on behalf of the states." It is similar to the federal income tax, which is a tax on employees, not the governments that collects it through withholdings in paychecks.

"Once you accept the view that a sales tax is paid by the consumer - hence the description of it as a 'consumption tax' - most of their arguments fall away," Crippen said.

Under Goodlatte's draft proposal, Crippen wrote in the letter, if a Virginian made an Internet purchase from a California firm, he would pay the tax of the state of origin for the Internet purchase. In other words, he or she would pay the higher California sales tax, collected by the California seller.

"Not only would the buyer pay taxes in a state in which he did not receive services and cannot vote (truly taxation without representation), he would see his tax bill go up," he wrote. "And because the higher tax rate would dissuade consumers from purchasing from California companies, those companies would have a strong incentive to more to lower or no-sales tax states, an incentive created by federal law."

Crippen cited as a preferable alternative, a bill drafted by Rep. Jason Chaffetz, R-Utah, which would recognize the consumer as the taxpayer and its home state as the legitimate taxing authority.  Under Chaffetz's draft, if a Virginian made an Internet purchase from a California firm, he would pay Virginia sales tax (also collected by the California seller) just as if he made the same purchase from a local store, Crippen said.

"This 'destination' based system promotes competition by creating a level playing field for local brick-and-mortar stores and their Internet counterparts," the NGA told Boehner in the letter.

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