The online sales tax cash grab: as states lunge for dot-com money, Congress threatens to get into the act.

• Author: de Rugy, Veronique

In 2014, U.S. sales on the Internet amounted to an estimated $305 billion. While still small in comparison to the $4.7 trillion in overall domestic sales, the online component grew 15 percent over the previous year, sending terror into the hearts not only of brick-and-mortar competitors, but of state legislators desperate to get their hands on sales-tax revenue.

Now the two groups are lobbying Congress to let state governments require businesses to collect sales taxes on out-of-state purchases made online. But they should be careful what they wish for: A bill on the subject is making headway on Capitol Hill, and it's not quite what the two lobbies wanted.

House Judiciary Chairman Bob Goodlatte (R-Va.) is circulating legislation--the Online Sales Simplification Act of 2015--that would make it easier for states to tax online purchases, while also limiting the states' power by allowing for something known as an "origin-based" sales tax. States would tax Internet sales based on the seller's location rather than the buyer's, the opposite of what sales tax expansionists have been pining for.

Under the bill, a California shopper who buys a product online from a vendor in Virginia would be taxed at Virginia's rate of 5.63 percent rather than California's rate of 8.41 percent. (Where local sales taxes exist, these would also apply.) Sellers with outlets in multiple states would collect taxes for the state where they have their largest presence.

The main benefit of an origin-based tax is that it encourages competition between the states, giving governments an incentive to limit their sales tax rates in order to attract and keep businesses. Such a system also allows consumers in high-tax states to escape the burden by buying from sellers in low-rate states. And because it allows taxes only on businesses within the taxers' jurisdictions, an origin-based tax is in line with constitutional protections for interstate commerce.

"Finally, someone in Congress has drafted an approach to the Internet sales tax issue that doesn't empower bureaucrats to tax across state lines and saddle Web-based retailers with enormous complexity," says Andrew Moylan, executive director of the pro-market R Street Institute. Moylan was alluding to the Marketplace Fairness Act, the states' preferred alternative to Goodlatte's bill. The act, which passed the Senate in 2013 but died in the House, would have allowed states to levy sales taxes based on buyers' locations.

As Moylan...