Politics & Policy

Sales Taxes and the Internet

If government wishes to levy a tax, let it do the work of collecting it.

Online commerce is a big, big business, accounting for nearly one-tenth of retail sales in the United States. It is a lively and growing sector, a bright spot in our troubled economy — thus the gloomy shadow of the taxman inevitably falls upon it, in the form of a bill proposed by Republican senators Mike Enzi of Wyoming and Lamar Alexander of Tennessee. A similar bill was proposed by Democratic senator Dick Durbin of Illinois earlier in the year, and a separate effort is afoot to have the so-called supercommittee institute new Internet-tax measures as part of its deficit-reduction plan.

But it’s not all about big business: The Enzi-Alexander bill would affect entrepreneurs with as little as $500,000 a year in sales.

Contrary to most accounts, there is no sales-tax loophole for online retailers. Customers who buy goods online are in most cases required to pay a “use tax” equivalent to the sales tax they would have paid in a conventional transaction. The problem, from the tax-consumers’ point of view, is that most taxpayers do not comply with the law. The state and local governments that depend upon sales-tax revenue protest that they are strapped for cash. That isn’t entirely true, either: Those jurisdictions are spending more money than ever, most of it on salaries and benefits for the legion of bureaucrats and commissars they maintain.

But in spite of their swollen payrolls and work forces, state and local governments apparently cannot be bothered to hire tax agents in sufficient numbers, thus the now universal practice of their requiring businesses to do their sales-tax collecting for them. The Internet-tax measures under consideration would not expand governments’ power to tax, but its power to conscript businesses into acting as tax collectors.

At the moment, their ability to do so is limited by longstanding interstate-commerce jurisprudence: The Supreme Court ruled in the 1967 Bellas Hess v. Illinois decision that states could require businesses to collect sales taxes in only those jurisdictions in which the businesses maintain an actual physical presence. That decision was confirmed in the 1992 Quill v. North Dakota decision. As a consequence of these cases, and of tax exemptions created in the early days of online retailing to foster nascent e-commerce enterprises, retail behemoths such as Amazon and Overstock collect taxes in only a handful of jurisdictions. This has of course led to complaints from such brick-and-mortar stalwarts as Walmart and Home Depot, which present themselves as the widows and orphans of this brave new world of free enterprise and eagerly back the Enzi-Alexander bill.

There are no good resolutions to this situation on the table. Some want to make all online retailers comply with tax-withholding rules in every U.S. sales-tax jurisdiction — and there are at least 8,000 of them — while the class-warfare party predictably wants to create a two-tier tax-collection system, targeting large firms but exempting smaller ones, in effect making companies such as Amazon and eBay second-class corporate citizens. Others desire to permanently enshrine all tax exemptions for online transactions into the law, leaving conventional retailers at a disadvantage in many situations.

Amazon, for its part, is not necessarily opposed to collecting taxes — indeed, it already has discovered a way to make money by collecting sales taxes on transactions involving third-party retailers that use its platform — but it does not wish to incur the administrative costs of cataloguing several thousand sets of complex sales-tax rules or keeping up with amendments to them. It therefore seeks a predictable third way that just so happens to be advantageous to its business interests: Establishing an interstate tax cartel to “harmonize” rates and procedures across the various U.S. taxing jurisdictions. (Any guess in which direction those many rates will be harmonized?)

Each of these proposals is defective. It is true that firms such as Amazon and eBay (or Apple, for that matter) are no longer fledglings, and that there is no compelling reason they cannot operate on the same basis as conventional nationwide retailers. But it also is true that imposing a heavy new tax-compliance burden on these firms unquestionably will obstruct their businesses. If we wish to prosper as a national economy, it makes little sense to force vital and innovative new enterprises to adopt business practices that would have been familiar to Richard Sears and Alvah C. Roebuck. The free and dynamic Internet economy should be the model for reforming unproductive and outdated arrangements with roots in distant history — not the other way around. The future of the U.S. economy probably looks more like Amazon than like Sears, with all due respect to that ancient institution.

“Harmonizing” tax rates is a term that will be familiar to our European friends as a euphemism for raising them across the board — not a recipe for prosperity, either. Tax competition is a useful check on state and local governments (ask Rick Perry). And creating a two-tiered system pitting the big firms against the small ones is just another example of having government pick winners and losers in the marketplace, which it does a poor job of (e.g., Solyndra, General Motors), and an invitation to game the system: Surely Amazon could find some small-time “partners” to help it make an end-run around the tax code.

The best and simplest solution is to tax Internet commerce solely at the point of origin, if it is to be taxed at all. This would have the benevolent effect of increasing tax competition among states, and possibly among cities.

The original sin here is government’s delegating its tax-collecting duties to private businesses. If government wishes to levy a tax, let it do the work of collecting it. It is true that this would prove burdensome to cities and states. It is also burdensome to the conscripted businesses. The difference is that collecting taxes is government’s duty, not Amazon’s.


The Latest