When you buy something at a local store, the merchant automatically tacks on state and local sales tax to the item’s purchase price. When items are purchased online taxes are not included in the total purchase price unless the vendor is located in the same state as the customer. Let’s say you want to save some money and purchase an I-Pad Mini from E-Bay for example, because the listed price is $39 less than the $329 list price from Apple. If the vendor is from Georgia and you are in New York, you would not incur and sales tax. But if the vendor is in NY, you would be charged 8.875% , or $25.74 on this purchase.
Why aren’t internet sales taxed now?
States and localities fund their operations from a variety of other taxes and fees including property taxes, income taxes, gasoline taxes, corporate taxes, usage fees (tolls, parking, water, garbage), and federal grants to administer programs such as Medicare and Medicaid. 45 of America’s 50 states have some sort of retail sales tax. The highest state tax is California’s 7.5%, but local sales taxes can add as much as another 3% in many locales.
The US Congress is currently considering new legislation to tax online retail transactions that have until now been largely free of sales taxes. This is because in 1992 the Supreme Court in Quill Corp. Vs. North Dakota ruled that a business must have a physical presence in a state for that state to require it to collect sales taxes, in part because of the complexities of doing so. It was the late pre internet age and the ruling referred to mail order retailers. The court explicitly stated that Congress can overrule the decision through legislation. Today, if an online retailer does not collect sales tax at the time of purchase, the consumer is supposed to pay the sales or “use” taxes on such purchases directly to the state when filing annual tax returns. This happens so rarely that Congress is now considering legislation to collect these “lost tax receipts”.
How much are we talking about?
Purchasing merchandise across state lines was historically limited to catalog buying and comprised only a small portion of retail sales. However, the growth of E-commerce has increased at more than twice the rate as bricks and mortar retail sales for 10 years, and now accounts for 5.5% of all retail sales. Internet sales are trending at a rate approaching $250 billion/year.
Local retailers and their many organizations have for several years supported efforts to tax online sales. They claim that online retailers have an unfair advantage when they do not charge consumers taxes. The congressional initiative known as the Marketplace Fairness Act (MFA) is the latest effort to tax internet sales. It will require all retailers with sales over $1 million/year to use “simplifying” software from the Streamlined Sales Tax Project (SSTP), which will be instantaneously able to sort through the thousands of taxing entities and calculate taxes for each locale in order to collect, report and remit local sales taxes for each one. If enacted, all internet sales other than from very small vendors will be taxed regardless of the location of the vendor. The MFA is estimated to generate from $11 billion to as much as $24 billion to state and local governments. Shown below is the relative impact upon consumers in the various states.
Why the MFA is not good legislation
Proponents claim that sales taxes are merely one of several methods to fund local and state governments. But sales taxes in most locales are a way that these governments mitigate property taxes. In terms of “fairness”, sales taxes are far more regressive than property taxes, which are disproportionally imposed upon our wealthier citizens.
An internet tax allocates sales from each retailer to each state and local entity. Yet it also creates the framework for a federal sales tax, or VAT. Lawmakers salivate at the prospects for a “new” revenue stream. Those seeking more limited government are strenuously opposed.
More troubling than the prospect of additional taxes is that an internet tax would be an egregious violation of federalism, in that states would be able to enforce their tax laws outside their borders. Online retailers would be remitting taxes to governments where they are unrepresented, and local citizens would be precluded from voting with their wallets by purchasing from vendors who do not charge those taxes.
A privacy concern related to internet taxes is that the SSTP software creates a vast new database which could be used to track any individual’s purchases. At some point, a security breach is a massive risk which could make this information available to unauthorized parties. Potential government usage of the data is more dangerous. Diogenes is entirely uncomfortable with this.
Internet retailers may not have to pay local taxes, but this advantage is mostly mitigated by two factors. First, shipping charges are often about equal to sales taxes. Secondly, ordering online requires consumers to wait for their merchandise, and many shoppers require the instant gratification that local shops provide.
Diogenes believes that the case for taxing internet sales with the MFA is not at all persuasive. It is contrary to good public policy in that it taxes citizens without representation or benefit. It creates privacy concerns. It creates the framework for a new federal VAT. Evening the playing field with local retailers is not a valid reason to take billions more in taxes from Americans.
Some believe that internet retailers should pay some sales taxes, albeit at lesser rates because of their better ecological footprint and diminished use of local services. After all, online sales don’t need more cops or streets paved or other costs which support local retail. Internet sales also allow for efficient warehousing and delivery which could reduce America’s carbon footprint.
There is an alternative solution to an internet sales tax than that proposed by the Marketplace Fairness Act. Diogenes believes that internet sales could and should be taxed at the rate in effect at the location of the vendor, in the same way that sales at local retailers are taxed. There would be no reports to file, data to be collected, violation of federalism or infrastructure created for other new taxes. A consequence of this solution would be that many smaller internet vendors might relocate to one of the five states that do not levy sales taxes. This “competition” between the states is a wonderful benefit for all citizens to make use of…or not.