Democrats Trying Again to Tax Internet

Legislation to tax Internet sales has a perfect record entering this year’s Congress—after five attempts to pass it, it’s 0-5—but there are signs that this year’s bill could be the one to break the cycle of futility.

For one, the bill, proposed by Massachusetts Rep. William Delahunt, has a catchy title: The Main Street Fairness Act. The “Main Street” stroke was ingenious, giving the bill that coveted Tea Party imprimatur, although the “Fairness” part gives it away as a Democratic wolf in sheep’s clothing.
Note to Democrats: It may be time to retire the word “fairness.” Just about everyone has figured out that it now means “government-enforced equality” (See “Doctrine, Fairness”).

The legislation also benefits from excellent timing. While past bills faced impediments to passage, such as George W. Bush, this year’s version has friends in high places, such as the Democratic House, Senate and White House. Republicans have been encouraged to sign on as cosponsors, although so far none have.

Then there’s the economy. As Iowa state Rep. Chris Rants can tell you, times are tight, not just for average Joes but also for state legislatures. Rants co-chairs the National Conference of State Legislatures’ task force on State & Local Taxation of Communications and Electronic Commerce, which, as its name implies, tries to figure out how to levy state and local taxes on communications and electronic commerce.

According to Rants, “With the adoption of the Delahunt legislation, at a time when states are facing historic budget gaps, Congress can provide fiscal relief, $23 billion, for the states without a single penny of cost to the federal government.”

Not a single penny of that $23 billion will come from the federal government, because every single penny will come from those who buy products on the Internet, better known as “people.”

For those who snoozed through Economics 101, let’s review: When the government levies a tax on business, the cost is passed on to the consumer.

That’s why when a state raises its sales tax, prices go up! The same phenomenon would occur with an online sales tax, economists will tell you, unless they’re Keynesians.

“This bill is asking Congress to force what’s effectively a tax on consumers,” said Steve DelBianco, executive director of the NetChoice coalition, which includes Internet bigwigs such as AOL, eBay, Expedia and Yahoo. “People will be paying more in taxes than they’ve ever paid.”
DelBianco challenges the $23 billion figure, pointing to an industry estimate that shows it would be half that. He also doesn’t buy the states-are-desperate argument, noting that the states were pushing for an Internet sales tax even when times were flush.

The pro-tax forces have long argued that the absence of an online sales tax puts brick-and-mortar stores at a competitive disadvantage. Internet businesses counter that their customers are already paying extra for costs not shared by the brick-and-mortars, namely shipping and handling.

A huge obstacle to an online sales tax has been the issue of complexity. A WalMart in Los Angeles only has to worry about one tax rate—the one in Los Angeles—while Internet companies would have to deal with the tax codes in 7,500 jurisdictions. That complicated patchwork of tax codes was one reason the Supreme Court ruled in 1992 that out-of-state retailers can’t be compelled to collect state sales taxes—unless Congress says so.

“The Supreme Court ruled that either the states must simplify their laws or go to Congress,” said Mr. DelBianco. “Congress has to give states this mandate to tax Internet sales. After ten years, it’s become clear the states aren’t really going to be able to simplify, so they’re just going to claim hardship and push this through anyway.”

The complexity doesn’t end with the myriad tax rates, he said. There’s applying the correct rate to the sale, collecting the tax, remitting and filing the taxes to the states, coping with returns and exchanges, and being able to back up those transactions if audited—in 7,500 jurisdictions.

Then there’s the question of sourcing: Should the tax rate apply to where the product is being shipped, or where the sale originates?

The Delahunt bill tries to address such headaches by requiring participating states to pass the Streamlined Sales and Use Tax Agreement, which creates a “level playing field for all sellers.” So far 24 states have signed the agreement.

There’s also an exemption for small businesses, which were once defined as those with remote sales less than $5 million annually, but could be amended by a governing board to $100,000.
Tod Cohen, eBay’s vice-president for government relations, said in a statement he didn’t think it would happen.

“At a time when unemployment rates are high and small businesses across the country are closing shop, we are confident that Congress will protect small Internet retailers and the consumers they serve from another Internet tax scheme,” said Cohen.

Note to Tod: The economy is sputtering, the Bush tax cuts are about to expire, and in response, Congress is considering a host of new tax increases. That’s what known these days as “fairness.”