’Net Taxes: Deal With The Devil

Pete Sepp

Recently a group of America’s major retailers, including Wal-Mart and Target, came to a “voluntary” agreement with 38 states plus the District of Columbia to begin charging sales taxes for purchases all customers make through their online websites. Previously, the U.S. Supreme Court had ruled that a state cannot force a firm to collect taxes on an out-of-state buyer (unless the firm has a “substantial physical presence” in that state). It is worth noting that all the named parties to the current deal, while selling online as separate entities, do indeed have a “substantial physical presence” in virtually every state.

This seemingly modest concession has fiscally lethal fallout: a “symbolic victory” (in the words of the Washington Post) that will give momentum to the state-sponsored Streamlined Sales Tax Project (SSTP). This much more ambitious scheme, which would need approval from the U.S. Congress, seeks blanket of taxation on all Internet purchases, even from firms that do business solely online or through catalogues. Both state officials and the National Retail Federation are praising the SSTP as a way to treat companies more equitably, and raise revenues for cash-hungry governments. Unfortunately, a broader tax cartel could have devilish consequences for consumers, taxpayers, and businesses.

For one, the price of every good sold over the Internet reflects the income, property, payroll, and other taxes that the online seller is now paying. The shipping costs that customers pay for these items often include fuel and other levies that deliverers pay in the course of fulfilling an order. On top of all this, web-based businesses and their customers, who rely on phone lines for their transactions, pay telecommunications taxes – often at higher rates than conventional sales taxes – that may not burden traditional retail operations as heavily.

The real fairness question comes down to this: why should a merchant collect taxes for a government whose services he may never need? Where would the taxable event occur in a sale involving a firm headquartered in one state and a buyer in a second state, which was facilitated by a server in a third, and shipped from a warehouse in a fourth?

This is not a matter for idle speculation. A spokesman for Amazon.com, which is partnered with participants in the new voluntary collection scheme, said that the purely-online book-selling giant will find it “incredibly difficult and incredibly expensive” to figure out the proper rate to charge customers (there are an estimated 7,500 sales taxes in place across the U.S.). The compliance headaches would only multiply for large and small businesses alike, if greedy governments push harder for the SSTP.

And, far from ruining “Mom and Pop” stores, many new small retailers have set up in cyberspace instead – reaching millions of potential customers with specialty products in a way they never could before. The U.S. Department of Commerce predicted that by the end of last year, “85% of small firms [would] be conducting business over the Internet.” Why should entrepreneurs who have adapted to the New Economy be punished with tax hikes?

The SSTP could be further fueled by the desperation of huge budget deficits. Yet ironically, state receipts grew far faster than inflation or the population during the 1990s tech boom, only to be squandered on massive new spending programs. Even today, the politicians’ poverty pleas are unconvincing: state and local governments took a higher share of the nation’s economic output in 2002 than they did in 2001. Taxpayers shouldn’t be forced to reward this fiscally irresponsible behavior.

According to a study by economist Steve Moore, the ten lowest-taxing states had better job creation, personal income growth, budget reserves, and bond ratings between 1990 and 2000 than the ten states which increased taxes or kept them high. Another analysis from Austan Goolsbee estimated that online expenditures would fall 30% if blanket sales taxes were applied to Internet purchases. Taken together, this research suggests that leaving the e-commerce structure alone could very well mean a windfall to governments because of other, non-sales tax revenues that “dot-coms” generate.

Instead of pointing fickle fingers of “fairness” at each other, members of the business community should unite and demand lower taxes across the board. Congress should also put an end to the states’ extortion racket, by passing legislation to explicitly prohibit additional taxes on Internet purchases. No firm in America should have to sell its soul in order to sell products online.

About the Author Sepp is Vice President for Communications with the National Taxpayers Union (NTU), a 335,000-member citizen group founded in 1969 to work for lower taxes, less wasteful spending, and accountable government at all levels.

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