Sales Taxes For the Internet


Senator Dick Durbin (D-IL) is pushing a piece of legislation with the grimly amusing Orwellian name of “The Main Street Fairness Act.”  What act of this monstrous and benevolent government could bring “fairness” to the desperate Main Streets of America?  Why, taxing Internet sales, of course.

The NY Post suggests that “Such a tax would plow more than $1 billion in tax revenues into the state coffers for the 2012 budget, according to some estimates.”  They go on to cite University of Tennessee economics professor William Fox, a strong advocate of the Internet tax, who estimates that New York “lost” about $865.5 million in tax revenues due to untaxed Internet sales in 2010.  This would ostensibly have gone a long way toward resolving the state’s billion dollar budget deficit.

The concept of taxing Internet sales faces some thorny Constitutional issues, because if an online retailer maintains no physical presence in a state, it cannot be required to pay tax on its activities in that state.  The “Main Street Fairness Act” gets around this by expanding the concept of a taxable presence, or “nexus,” to include affiliates of the targeted company.  Thus, if has an affiliate in Illinois, all Amazon sales to Illinois residents become taxable.

Durbin’s home state of Illinois put its own “Main Street Fairness Act” into effect last month.  This immediately prompted to sever its ties with affiliates in the state, to escape the effects of the law.  If the same law were imposed nationwide, there would be no way to escape it… except shifting operations out of the country, of course.  Get ready for a new round of bellyaching about “outsourcing!”

Proponents of the Internet tax argue that tax-free online sales give an unfair advantage to Internet retailers that don’t maintain brick-and-mortar operations in every state.  This is somewhat offset by the cost of shipping, the time required for products to be shipped to consumers, and the preference of many computers to see and touch an item before buying it.  Online sales have grown explosively over the last few years, but they haven’t overwhelmed traditional retail.

These “Amazon taxes” have been tried in a few states besides Illinois, and they never seem to provide the revenue windfall promised by their sponsors.  As the Tax Foundation reported last year, Rhode Island “has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.” 

As the Tax Foundation goes on to explain, making Internet sales taxable would not “level the playing field” with brick-and-mortar companies.  Instead, it would impose a significant disadvantage upon online retailers, because they would be responsible for collecting and remitting taxes to every state – which is fifty times more work than a local retailer must do.  This isn’t just a matter of stuffing checks into fifty different envelopes and mailing them to every state capitol at the end of each month.  Significant paperwork, and periodic audits, accompany the remittance of sales taxes.

It could even become worse than that, because some areas have county and local surtaxes too.  If it’s an unfair competitive advantage to allow online retailers to let online retailers skate on state taxes, isn’t it also unfair to let them get out of paying those local taxes?  If so, an online company would end up filling out hundreds, perhaps even thousands, of tax forms every month or quarter.  That’s a considerable, but manageable, expense for a big outfit like… but it would put smaller online operations out of business.

It was inevitable that the termite State would view the pristine timber of tax-free Internet sales as a tantalizing feast.  The last thing America needs is another layer of complexity in its tax code.  The last thing insolvent states need is another phantasmal revenue stream that will enable more irresponsible spending, fueled by promises of big Amazon sales taxes that should be rolling in Any Day Now. 

The growth of tax-free online sales is a good thing for the fiscal health of the states… because it provides an escape valve to temper the worst of their tax-raising inclinations.  Let the big spenders in every state capitol worry about frustrated consumers abandoning local businesses, and shifting their business to retailers to escape ridiculous sales taxes.  It will help to keep them honest.  The only “level playing field” American consumers need will be created by lowering taxes across the board, not ending the “tax holiday” for the new online retail market.