Internet sales and invisible taxes

One of the arguments deployed by proponents of taxing Internet sales is that such taxes would not be ???new.???  No one is paying the tax right now, so the observable real-world effect upon consumers would be a new tax bill, after state governments were given the authority to make online retailers collect and remit state and local sales taxes.  The value of these new taxes has been estimated at roughly $125 per year for the average consumer.  All together, it???s about $23 billion in new tax revenue, which is why state governments ??? including a growing number of Republicans ??? are so eager to collect it.

But the argument goes that these wouldn???t really be ???new??? taxes, because Internet sales were not explicitly meant to be uniquely exempt from taxation.  Things have worked out that way, because state governments cannot establish a Constitutionally-required ???nexus??? for taxing online merchants.  If an online retailer has no physical presence in a given state, the state cannot tax its sales, because the company derives no direct benefit from the state, and casts no votes in its elections.

Subverting this requirement would be a very literal exercise of ???taxation without representation.???  However, we are told that the taxes themselves wouldn???t be ???new.???  It would be a matter of collecting existing taxes that are currently – and in the opinion of many brick-and-mortar retailers unfairly – avoided.

Deconstructing this argument reveals the troubling issue at the heart of Internet taxation… because those who make the argument are completely wrong-headed about who is avoiding these taxes.  It???s not the Internet retailers, it???s the consumers.

Every state has different tax laws, but many of them actually do require consumers to total up the amount of tax-free interstate purchases they make, calculate state sales tax, and remit those taxes to the local authorities.  This applies not only to Internet sales, but even to people who drive across the state border to shop in low-tax adjacent states.  Of course, very few people actually do this.

Thus, if Internet tax enthusiasts really want to talk about collecting existing taxes, what they should be advocating is the enforcement of existing laws: force individual consumers to calculate state and local taxes on all of their remote purchases, and send a check to the appropriate government agencies every year, or every quarter.  This would, of course, be extremely unpopular.  I think the phrase ???howls of protest??? would not be hyperbolic to describe the reaction.

It would also impose immense enforcement costs upon the government, which would have to develop a method for tracking online purchases and auditing individual consumers.  This would require quite a few new IRS agents, plus state and local personnel.  Big Government types might relish this prospect, but in this era of wild deficit spending, fiscal collapse, and tight budgets, the American people probably wouldn???t be eager to pay for it ??? especially since it would be a massive new government expense designed to make their lives more difficult.  A lot of the money harvested from increased tax collection would be consumed by enforcement costs.

So what we???re really talking about here is the government attempting to draft Internet companies as tax collectors – shifting all of the expense and unpopularity onto private industry, in the form of an unfunded mandate.

And that expense would be gigantic.  Under the Marketplace Fairness Act, Internet companies with more than $500,000 in gross annual sales would be forced to comply with the complicated laws of all fifty states??? and depending on how some provisions of the law are interpreted, they might have to collect and remit taxes to over 9,000 local governments as well.

Anyone who thinks that cost, combined with the threat of multiple state and local tax audits, would not obliterate smaller online retailers simply does not understand how a business operates.  No brick-and-mortar retailer of comparable size faces a remotely similar burden.  Huge corporations with tens of millions of dollars in receipts have accounting resources which are not available to a small business with $40k or $50k in monthly sales.  Even at that, sales tax processing for big national retail companies tends to be decentralized, precisely because requiring a single central office to fill out thousands of state and local tax returns for millions of dollars in sales is inefficient, and likely to result in dangerous errors.

It???s much more logical to ask individuals to compute their own sales taxes, based on the single set of laws governing their place of residence.  Any given consumer would generally be asked to pay only one state tax rate, plus a single group of local taxes.  The rare exception would be someone who changes their residence several times during the year, but that could be addressed by making sales tax remission an annual chore, based on legal residence at the beginning of the year.  Consumers could be held individually accountable for errors and omissions.

But of course, no one wants to do that, and government at every level is terrified of letting taxpayers see just how complicated and confiscatory its tax regimes really are.  Voters are cranky enough about filling out a federal 1040EZ once per year – and most of those taxes are automatically, invisibly siphoned out of their paychecks, by employers who have already been dragged into service as tax collectors.  The government wants to impress private business into service for tax collection as much as possible, because it conceals both the extent of taxation, and the costs associated with compliance.  All of those costs are passed along to individuals through inflated prices, which they meekly pay without wondering how much of every retail dollar ends up in the hands of government bureaucrats.

We should be making our system more transparent and less confiscatory, not scheming to find new ways for government to grab more cash and cripple nascent industries.  Brick-and-mortar retailers who complain that tax-free Internet sales are ???unfair??? are looking at the wrong villains.  Not a single consumer in the United States of America is treated fairly and honestly by his government.