Internet Tax

“The word bipartisan means some larger-than-usual deception is being carried out” – George Carlin.


The above quote may be from a comedian but the sentiment is no laughing matter. Late last week the US Senate held a vote on a budget resolution and decided they would sneak in a wholly unrelated bill, the euphemistically named “Marketplace Fairness Act”. Sadly there was strong bipartisan support for this embedded bill (75 for 25 against). The putative goal of this legislation is to put brick and mortar stores on an equal footing with online retailers with respect to sales tax collection. Presently, if you purchase goods online from a seller that has no “nexus” (that is, no physical presence) in your state then YOU, not the reseller, are responsible for submitting the appropriate sales tax to your state. As I’m sure you’re aware this is hardly ever enforced (as it would be political suicide).

The politically expedient route then is to go after out of state retailers who have no voice or vote and shake them down for tax money. So apparently if Party A is harmed and Party B is not, it makes more sense to start harming Party B rather to stop harming Party A. Brilliant.

My goal is not pick through everything wrong with this bill (and there is a lot) but rather to suggest a simple and viable alternative. Instead of forcing retailers to keep track of a myriad of different taxing authorities and a multitude of filing deadlines and burdensome paperwork (the claim that this bill simplifies filing is a ruse), why not simply impose the sales tax on the source of the sale rather than the destination? This is how our current sales tax system operates. Brick and mortar retailers do not vary the tax they charge based on their customer’s zip code. There is no functional difference between a buyer driving out of state, buying a good, then driving back home versus that same buyer buying that same good on-line and paying a shipper to retrieve said good.

Internet based retailers should therefore collect sales taxes just as though the customer walked into their premises and made the purchase. Then they only have one tax rate and one taxing authority to deal with and their locality benefits from those sales just as they would from a local sale. This approach entirely undercuts the arguments of brick and mortar stores. 1) Most of the country has sales taxes so anything bought on line will not be “tax free” but will bear the cost of the local sales tax of the seller and 2) for every sale “lost” to a remote seller the local retailer can also “steal” sales by selling their wares on line (this is already taking place: Amazon and Ebay have become a virtual shopping mall of brick and mortar stores selling on line).

The only plausible objection to this plan would be that online retailers would move their operations into low or no sales tax regions of the country or that high tax region retailers would be at a disadvantage relative to low tax regions. Tough. If that is the case then either (a) those businesses can leave or (b) they can bring political pressure to bear on their LOCAL politicians to lower their rates. The tax competition arising from this system will tend to equalize tax rates across the country as they are shifted downward toward the absolutely minimum sustainable level (just as competition pushes prices down in any market). Source based taxing exposes the tax policies of each region to the worldwide “wallet voting” of potential customers. However destination based taxing limits interregional competition and removes the possibility of locals benefiting from lowered taxes due to outside tax competition. Government doesn’t like competition, so it is little wonder the destination based system is favored by the political class.

At the end of the day it’s a gamble: you can go with the destination taxing and gain taxes on internet sales to locals while losing out on taxes on internet sales to non-locals or go with source taxing and have the reverse. The former is an untested, complicated and burdensome system, the latter far simpler and requires no procedural changes from our current method of sales tax collection. Of course the simplest way to “level the playing field” would be to simply eliminate all sales taxes. But that is an altogether different discussion.