Internet Purchases Shouldn't Be Subsidized

Can our state and local governments afford to subsidize businesses that conduct their sales only on the internet, rather than through physical retail stores? And if we could, is there a good reason to do so?

These are the two most obvious questions when addressing the issue of whether internet businesses, such as the e-commerce pioneer Amazon.com, should have to collect and pay the same sales taxes as your neighborhood brick-and-mortar music store (if you have one) has to do. Currently they do not.

On the affordability question, the answer appears to be no and getting more no. Fiscal year 2009 begins in a few weeks, and at least 29 states plus the District of Columbia are facing budget shortfalls. According to the Center on Budget and Policy Priorities, these states have faced a combined shortfall of $48 billion, or more than 9 percent of their general fund budgets.

Although many of these states have been taking measures to close their budget gaps, the current projections are likely to wind up being over-optimistic. The recession in this country has barely begun, and most governments are very likely under-estimating their revenue declines for the coming fiscal year. The housing bubble that accumulated between 1996 and 2006 gave homeowners an extra $8 trillion of paper wealth. But what a bubble giveth, it taketh away too, and only about half of this bubble has deflated.

As the rest of the bubble collapses, there will be a lot less property tax revenue to fund schools, police, and other government services. As the recession deepens, unemployment rises, and consumers cut back on spending, state and local government revenue from income tax, sales tax, and other sources will decline more than anticipated. Unlike the federal government, most states cannot borrow to cover an operational budget deficit. This means that they will cut spending, including such items as health insurance for children and low-income families, child care, and elementary education. In fact, at least 18 states are already making these kinds of cuts, and the recession has barely started.

In the last recession, which lasted only eight months and was mild compared to what can be expected this time, more than a million people lost health coverage because of state spending cuts.

So we cannot afford to lose tens of billions of dollars in state and local tax revenues by exempting internet sales. But even if it were affordable, there is no good economic reason to do so. Why should our governments favor far-away internet distribution centers over local businesses? This is not good for local or regional economic development. The problem will worsen as internet sales increase each year.

It has been argued that the burden of following the sales tax regulations for 50 states and thousands of local taxing jurisdictions is too much for internet businesses. But the availability of software and service companies has taken the wind out of this argument. Others complain that sales taxes are in general regressive - that is, such taxes take proportionately more from lower-income groups. This is true, but exempting internet sales makes the tax system even more regressive, since internet buyers as a group have higher-than-average income.

So if your local sporting goods store can collect and pay a sales tax on the running shoes that it sells, the big internet retailers can do the same. No need to give e-commerce a 4 to 9 percent advantage to ship from across the country and use more packaging and delivery services. They can compete on the same terms as everyone else, and stop draining badly needed revenue from our state and local governments.

This column was distributed by McClatchy Tribune Information Services on June 10, 2008 and published in the Atlanta Journal-Constitution and other newspapers.

Comments

[NewtonSylmar]

Germany and Canada have a national sales tax...we do not. The individual states set their own sales tax levels, which is a big part of the reason why interstate transactions are not charged. First, which state's sales tax do you use...the buyer's or the seller's? The lower or the higher? Secondly, states with lower sales tax would most likely make more sales. Finally, forcing the seller to charge taxes on top of the shipping charges would most likely make interstate commerce less attractive to them, because they would be forced to pass those costs to the buyer. If we tried to impose a national sales tax, a lot of states would benefit (those with taxes higher than the national), but I believe even more would suffer (those with taxes lower than the national).

Dealing with internet-based transactions opens up another level of problems. If the company is located in one state, but their servers are located in another state, which state's tax do you use? I can pretty much guarantee you that if internet transactions are taxed, Nevada will definitely be the biggest winner, due to the simple fact that the Nevada Secretary of State does not information-share with the IRS.

[robinhood2]

This issue could have been solved by Congress years ago, but they were too chicken. All they had to do was change the law and eliminate the interstate sales tax exemption for companies not doing business in the state of the buyer. In theory, buyers are required to pay a use tax to the state where they live, in practice, most (nearly all?) don't. Even if the sellers were required to charge a sales tax and remit it to their own state government, it would still end up creating a more level playing field. But Oregon and New Hampshire do not levy a sales tax. No solution is perfect. In Germany, a uniform VAT (sales tax) is collected across the country and is shared by the Federal and state governments.

[Aaror]

Silly thought, slap a US sales tax on goods shipped from one state to another, or on goods shipped from overseas, that runs, say 10%, allow retailers to pay the individual state taxes or this "penalty tax." Then distribute the revenue from the nationwide sales tax to the states that use a sales tax based on their rates.
You would be surprised how quickly the internet stores could figure out the tax rates to avoid a flat 10% sales tax...

[shamaniceconomist]

Since the U.S. constitution assigns interstate commerce to the federal government, if there needs to be a new tax on Internet transactions, which by nature aren't located in any one state, it would have to be a federal sales tax, and the money would have to go to Washington. Now, how many state politicians still support this idea? None, right? And so it's safe to assume this whole idea is just a money grab by state governments, right?

[freedomforamerica]

I run a brick and morter store and I can tell you that what another poster said is true: It's the Overhead, Stupid. It seems like every single day another website starts selling what I sell and they have zero risk, zero overhead, zero payroll taxes.... the list goes on. They are killing traditional retail. I say they need to play by the same rules-- slap on some sales tax and the average consumer no longer sees a reason to pay shipping AND sales tax. They'll walk downtown and shop instead.

[95flhtcu]

I for one, shop on the internet so I don't have to drive across town. Paying sales tax isn't going to stop that. I try to patronize my local stores but when I can save $150.00 on say, a digital camera over what I'd pay locally, I don't consider it a choice. I have to save the 150. I can't afford to donate that money to my local camera store. If the difference was 50 dollars, I probably would have purchased it locally. I brought the internet offer to the camera store and they wouldn't bring their price down one dollar. Somehow, I dont think that they're selling Nikon camera equipment at cost. I think that local businesses that won't even try to meet the price of an internet retailer are shooting themselves in the foot.

[RobinSeattle]

Look, the fact is that sales taxes are anti-progressive and they hurt business. I would also submit to you that the costs of trying to hunt down a taxpayer who evaded his state's sales taxes going online actually costs more than what they would collect. This was true in Washington state, where there is no income tax, when they tried to clampdown on internet cigarette sales. This was a money loser for Olympia. It is also thorny for politicians since voters will not be happy getting surprise supplemental tax bills from the state's tax authority.

The actual solution is to revise the tax code so that people are taxed on their ability to pay. But politicians are so chicken nowadays and beholden to wealthy contributors besides that you get distortions such as sales taxes approaching 10% that still don't stop schools from deteriorating and roads and other infrastructure from continuing to be unattended to as needed.

And raising sales taxes in a recession, as has been said earlier, is insanity.

[Rocket80]

More thoughts of raising taxes during a recession?? This is absurd - how can people take this seriously? Go ahead, tax Amazon, what do they care. You write as if the company is gaining an unfair advantage and should thusly be punished, a typical socialist view, when the reality is that it has an advantage because it uses a superior business model. As the guy before said, overhead makes all the difference. You proposal is not a punishment on a successful company in order to 'level the playing field' as you would spin it - it is a punishment to the consumer....US.

[Sumocat]

Lot of pretty words, but the truth is businesses don't pay sales tax - consumers do. When I go to the store, I pay money for a good or service, then pay a tax on top of that. Who pays? I do. The business is just the collection agency. You want to make things equal - drop the sales tax. The taxes on earning money or owning property can be raised to fill the gap.

[Sundialsvc4]

I personally think that it is reasonable that online purchases should be subject to the same local and state sales-taxes that apply where the purchaser resides. Given the extreme worldwide scope of the Internet, it appears most-fair to me that the purchase should be taxed according to the location of the buyer, not the seller.

Tax-collection would have to be automatic, levied and collected by online services such as PayPal. It would not be a trivial thing to implement, and of course it could be evaded, but it could be done.

The principle of taxation, I think, is a sound one... it IS how municipal services of all kinds are paid-for... and I do not think that online commerce will fall-over-dead if it is taxed. But I also think that it's easy to be overly-optimistic about how much revenue such a system will actually bring.

[SaigonHappened]

This is the second ridiculous article I've seen on the HuffPo about the need for internet businesses to collect sales taxes so as not to be "subsidized" relative to "local businesses." Go ahead, tax them. Fat lot of good it will do you. I've done both -- built a brick and mortar store up from nothing and been an online retailer. I can tell you I wouldn't start a brick and mortar store again to save my life, and, yes, mine was a success. If you think the difference between the two is sales tax -- HA! DOUBLE HA! In the first place, the customer pays the sales tax, so who cares from the business owner's perspective. In the second place, the difference in pricing is not due to sales taxes, IT"S THE OVERHEAD, STUPID!!!! A brick and mortar is nothing but f--ing overhead!!! I can run the same business out of my basement online with NONE of the overhead. Get a clue -- video killed the radio star, and the internet killed the mom and pop, sales tax or no!!! Sheesh!!

[jvarga]

"No need to give e-commerce a 4 to 9 percent advantage to ship from across the country and use more packaging and delivery services."

Doesn't an item have to get shipped to my local store from a distributer somewhere? Then I have to get in my car and make a trip to some store to buy it, dealing with hellish traffic and having my 5 mile drive take 30 minutes. Or the UPS guy can do his daily route and drop off 1,000 packages at my apartment complex's rental office where we can all walk to pick them up. Why not couple this with a new $4.00 per gallon gas tax just to finish destroying whats left of my ability (and the ability of people like me) to support ourselves.

Its not like the increased sales tax will do anything to alleviate the fact that everything costs so damn much here, its not going to keep my utility bills down (electric is going up twice per year it seems, for example) and its not going to fix the fact that I'm paid government approved slave wages.

But hey, I'm not poor enough as is, so more taxes please.

[midtown]

And not only do you have to get in your car to get to that store, but every single purchase represents a car burning gas, and every single car out on the road takes its toll on the infrastructure that the sales tax collected would wind up being spent on.

Bring those troops home and save multo-billions per month and you wont need this loony idea.