The subject of whether states should be allowed to legally obligate retailers based in other states to collect sales tax has been something of a hotbed recently. On the conservative side, the claim is that brick and mortar stores suffer, because they have to collect sales tax, while online businesses only have to collect tax if they have a physical presence in the state. The liberal claim is that sales tax tends to stay low enough that normal price fluctuations for many goods make a significantly bigger difference. If this is true, then the claims that people can usually find products for cheaper online, because the sellers don't have to collect tax, is unfounded. There seems to be several important details that are ignored though.
The first is shipping. Brick and mortar stores ship everything to a central location. This allows them to take advantage of bulk rates for larger shipments. The customers then come to the physical location, eliminating any obvious outward shipping costs. Online retailers have to ship to their own location, and then they have to ship to individual customers. They cannot get bulk rates on the outward shipping, because the destinations are residential and the products are individually packaged. Depending on the particular product, shipping can easily be much higher than even the highest state sales tax (as of 2014, the highest state sales tax was 7.5%). This does depend on the particular product. A diamond ring worth $5,000 could cost $5 to ship, skipping things like insurance, and even with insurance, the price barely approaches 1% of the value of the item. An online retailer would definitely benefit from not having to collect sales tax. Most products, however, do not have such a low shipping cost to value ratio. A vast majority of lower cost products cost enough to ship that shipping can run as high as 50% to 75% of the value of the product, and for products worth less than $20, you can easily end up paying several times the cost of the product in shipping. The important fact, however, is that a vast majority of products you can buy online cost more shipping than sales tax would cost (and, in case you want to discuss free shipping, someone is paying for it; usually it is worked into the price of the product or other products commonly purchased with that product).
The second detail is the fact that a vast majority of online retailers are small businesses. In fact, there are many times more online businesses at this point than there are brick and mortar stores. What this means is that forcing online retailers to collect tax is going to do far more harm to small businesses than the current situation, even if the claims about taxes and pricing were true. The big argument right now is that small brick and mortar stores deserve a fair playing ground, but the comparison is always against huge online retailers like Amazon. Amazon does not have lower prices because they don't have to charge sales tax. They have lower prices because they operate at a much larger scale than small businesses. Compare these small brick and mortar stores to small online businesses, and you will find that the big pull for online sales is not price. Prices for small online businesses are often comparable, if not higher than small brick and mortar stores. People shop online for niche products because they cannot find a nearby brick and mortar store selling what they want. Forcing these small online businesses to collect sales tax is going to bankrupt many of them, not because of lost sales, but because the extra work involved is too expensive. We are not talking about collecting tax for one state here. Online businesses will have to keep track of sales from every state with sales tax. They will have to keep track of what state what tax collection goes to, and they will have to do all of the tax paperwork for every state they sell to. Brick and mortal stores only have to collect tax for the state they are located in. Online stores will have to deal with that on a grand scale. It is beyond absurd to expect small businesses to do this.
The third ignored detail is the purpose of sales tax and of taxes in general. Brick and mortar stores cost the state money. There are law enforcement costs associated with protecting the physical property of the business. There are costs associated with utilities and traffic. The tax is actually paid by the customers. Just like the businesses, the customers cost the state money. It is reasonable for a brick and mortar store in a state to be required to collect sales tax, because all parties involved in the transaction owe a debt to the state for protection, social programs, and state administration. In online transactions across state borders, this is not the case. Customers living in a given state might owe the state, but the seller does not. If the seller owes anyone, it is the state that the seller is located in. Placing the burden of collecting sales tax for other states on the seller is unethical, because the seller is entirely unaffiliated with that state. It comes down to the same thing as before: We are talking about forcing millions of small online businesses to collect an manage tax for a huge number of states. Now, a bunch of one person businesses suddenly have to keep track of tax rates for every state.
To help understand the magnitude of forcing online businesses to collect sales tax for all states, consider the following. In the U.S., only 5 states do not have sales tax. That is 45 states that do. State sales tax rates range from 7.5% to 2.9%. Changes in state sales tax rates are fairly common, so an online business would have to keep close track of when state tax rates change and by how much. It would have to track 45 different values, and it would have to keep a close watch on the other 5 states as well, because there is no guarantee that they won't suddenly decide to add a sales tax. It would also have to keep track of where each sale came from, how much tax was charged, and when it was charged (in case of rate changes). It would have to sum all of the taxes for each state every year, and it would have to do tax paperwork for 45 states every year. This is the kind of work that most businesses have to hire a tax lawyer for. Small businesses cannot afford a tax lawyer, and if a small business owner was skilled enough to keep up with all of this, it would probably pay better to get a job doing it exclusively. In short, dealing with taxes at this level is a full time job, and small business owners already tend to work 60+ hours a week. This is not just economically unwise. It is downright unethical.
The real problem is that forcing online businesses to collect state sales taxes does not increase fairness. It removes an imaginary inconvenience from brick and mortal stores, and it utterly destroys online businesses. Brick and mortar stores only have to track sales tax for one state, making online businesses track sales tax for 45 states in no way makes things more fair. It cruelly eliminates a huge section of the competition for small brick and mortar stores, and it dramatically increases unemployment.
http://taxfoundation.org/article/state-and-local-sales-tax-rates-2014
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