The hour of Internet sales taxes is upon us

One of the few bright spots in this moribund economy is about to get stamped into the dirt, as the Senate prepares to vote on the “Marketplace Fairness Act,” which will give money-hungry state governments a way to tap into all that sweet tax-free Internet commerce.  It’s hard for politicians from high-tax states to keep from swooning when they think of all the cash they’ll rake in.

As Senator Kelly Ayotte (R-NH), an opponent of the bill, put it: “There is absolutely nothing conservative about this proposal because, again, what this is about is officials in cash-strapped States across the country looking for new ways to plug their budget holes.”

Senator Marco Rubio (R-FL) evidently is not a fan of the Marketplace Fairness Act either, issuing a Twitter message this morning that said, “Making business collect taxes for states they are not in is not fairness, it is a money grab.Hope we can defeat #internettax.”

David Addington of the Heritage Foundation lays out the situation:

The 1992 Quill Corporation decision protects out-of-state businesses that have no facilities or employees in a state, but receive orders by Internet, mail-order catalog, or telephone from in-state customers, often called ???remote sales.??? The Supreme Court held that, under the Constitution???s clause authorizing Congress to ???regulate commerce???among the several states,??? a state could not force those out-of-state businesses to collect the state???s sales tax on remote sales. However, the Court made clear that Congress could, if it wished, pass a law to authorize the states to impose that tax collection requirement on out-of-state businesses. Thus, Senators who wish to authorize states to require out-of-state businesses to serve as their tax collectors have introduced S. 743.

Here’s how Addington envisions the Internet sales tax regime working in practice.  Let’s all bid a fond farewell to the time-honored American principle of “no taxation without representation.”  It was nice while it lasted.

Take, for example, a company whose workforce and warehouses are in New Hampshire, and which has no contacts with Illinois other than taking remote sales orders over the Internet. If, and only if, S. 743 were enacted, the Illinois politicians could order the New Hampshire company to collect sales tax on those remote sales and send the taxes to the Illinois state government.

The Illinois politicians would have nothing to fear, because the damaging effects of the Illinois tax action fall on the New Hampshire company, in the form of an increase in the price of the company???s goods or a cut in its profit margins, or both. And, of course, the New Hampshire employees who understand what the Illinois government just did to them vote in New Hampshire, and not Illinois. Moreover, the Illinois consumers who would pay Illinois state sales taxes to the New Hampshire company, for subsequent forwarding to the Illinois treasury, would likely not understand that their payment of sales tax to the New Hampshire company is the result of a new taxation decision under S. 743 by their home state???s governing officials.

This matter of physical presence, or “nexus,” for the assessment of state and local taxes is not a trivial legalism (although God knows we’re expected to take plenty of other trivial legalisms seriously, when it suits the interests of Big Government.)  As Addington says, there are important issues of accountability to consider.  In his example, the New Hampshire company has no political influence in Illinois, not even in the mostly symbolic sense of having a few employees living in the Land of Lincoln, ready to make their voices heard in the next election.  The connection between paying taxes and voting is supposed to be one of the bedrock principles of the Republic, but increasingly “no taxation without representation” is just an empty slogan memorized by schoolchildren.

On the subject of accountability, Addington further notes “the federal politicians are so worried that somebody will figure out that their votes made taxes on remote Internet sales possible that they put a feels-good-but-does-nothing provision in section 3(d) of the bill that says ???[n]othing in this Act shall be construed as encouraging a State to impose sales and use taxes on any goods or services not subject to taxation prior to the date of the enactment of this Act??? – which, of course, leaves states perfectly free to impose the new taxes that the federal politicians authorize but claim not to be encouraging.”  There should be CSI crime-scene technicians dusting this bill for prints and DNA evidence.

There’s also the question of compliance with the new Internet tax regime, which will be an unholy nightmare for everyone except the big retailers who already handle sales tax in all 50 states, plus nearly 10,000 local jurisdictions.  That’s one reason big retailers, even those who conduct most of their business online, support the Internet sales tax idea.  Slightly lower sales are a small price to pay for dumping an immense competitive disadvantage on smaller businesses.

John Donahoe, the CEO of eBay, has been making this point in an email sent out to users of his online auction house, as he tries to work up a grassroots campaign against the Marketplace Fairness Act:  “This legislation treats you and big multi-billion dollar online retailers – such as Amazon – exactly the same.  Those fighting for this change refuse to acknowledge that the burden on businesses like yours is far greater than for a big national retailer.”

Reuters discussed the practical effect of Internet sales taxes with a small businessman who currently works through eBay, and he straightforwardly admitted that he’ll either have to scale back his business – just what the dead-parrot Obama economy needs! – or be driven into the waiting arms of

Wayne Johnson, who runs fly fishing retailer Anglers Habitat in Caldwell, Idaho, generates about $2.5 million in annual sales on eBay.

If the legislation passes in its current form, Johnson said he would re-organize his business to get annual out-of state online sales below the $1 million threshold.

That would involve laying off most of his staff, which currently consists of eight full-time employees and an accountant, he said.

More worryingly for eBay, Johnson said he would start selling through Amazon’s marketplace because Amazon handles warehouse storage, order fulfillment and shipping.

Amazon charges extra fees for these services, meaning Johnson’s business may be less profitable, but he said he would be able to keep running the online operation with very few staff.

“That’s where I would go if this bill passes,” Johnson added. “I could do that business with just my son and me.”

Personally, I’m no Amazon hater.  I love shopping with them, and I find most of their business and marketing strategies to be brilliant.  (Somehow they’ve managed to create an online shopping environment that is almost invariably helpful without being annoying, which is no easy trick.)  But every free marketeer should feel his hackles rise at the spectacle of a big business operation using government regulations to bludgeon its competition.  Amazon has, in the past, supported an exemption to Internet sales taxes for small retailers, but they set the limit at a paltry $500,000 in annual sales; eBay wants the exemption to be either $10 million in sales, or fewer than 51 employees.

Defenders of the Marketplace Fairness Act grow prickly at the suggestion it imposes a “new” tax, because in theory the residents of most states are supposed to be figuring up sales tax on their Internet purchases and voluntarily submitting it to the government.  The Internet sales tax regime is therefore presented as a “simpler” alternative the ludicrous hypothetical system that no one actually follows.  Good luck selling that argument to the public, guys.

Brick-and-mortar retails have a valid beef that high sales taxes put them at a disadvantage against online retailers, particularly when combined with the overhead costs of renting or buying store space, and employing a large staff.  But imposing a complex regime of sales taxes on small Internet merchants, in defiance of the principle of state and local tax authority based on physical presence, reverses the incentives that should be operating here.  Competition from online sales should spur customers and retailers to insist on lower, simpler taxes in their states and municipalities.  When commerce flees its jurisdiction, government at every level has two options: lure it back, or build fences to keep it from escaping.  A healthy economy requires a political and legislative environment that makes the former option vastly preferable.


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