Why Internet Sales Taxes Are Inevitable

on April 25, 2013
Reading Time: 2 minutes

Later today, the U.S. Senate will consider, and probably pass, a bill that allows states to collect sales taxes on online purchases shipped from other states. Though its fate in the rabidly anti-tax House is uncertain, sooner or later this bill or something like it will become law. And it’s about time.

The taxation of online, and earlier, mail order, sales has long been a mess. In 1992, the Supreme Court said that states could only tax the sales of companies that had a physical presence (or “nexus”) within their jurisdiction. The court recognized this would cause a lot of problems and more or less begged Congress to fix them, a pleas that has gone unanswered for two decades.

Beyond general anti-tax sentiment, two arguments were raised against allowing states to impose taxes. One is that complying with the crazy quilt of state and local sales tax rules and rates was simply too complicated for sellers. The second, which arose with the birth of 0online commerce in the late 1990s, was that taxation could kill a promising new form of business in its cradle.

The first argument is still being made, most vociferously by eBay. But it no longer makes much sense. A database can quickly tell a merchant whether a given product shipped to a given address is subject to tax and at what rate. And at a time when Amazon.com is threatening to devour traditional retailing, the argument for infant-industry protection is ridiculous.

Indeed, it is the success of Amazon and other online sellers that make new tax rules inevitable. As long as out-of-state sales consisted mainly of Land’s End polo shirts and L.L. Bean duck boots, the loss of taxes was annoying to states, but tolerable. No more. I’m probably ahead of most shoppers, but if it’s not something I have to check out physically, if I don’t have to try it on for fit, and if it isn’t perishable, I buy it online. Yesterday, I received four separate shipments from Amazon (one of them actually a book, albeit a used volume I would have had great trouble finding in a store.) With shoppers flocking online, states can no longer forgo the revenue.

The Senate bill would let the jurisdiction where the buyer lives collect the taxes. Adam Thierer of George Mason University’s Mercatus Center favors an alternative system where taxes would be collected by the seller’s state. This does have the advantage of being considerably simpler for sellers, since they would only have to pay taxes to their home jurisdictions and would only have to follow one set of rules. But I fear it would lead to large-scale gaming of the system, with sellers rushing to establish headquarters in the few states, such as Oregon and New Hampshire, that do not impose sales taxes. (Thierer argues that competition among states to attract business with lower rates would be a good thing.)

The complexity of having to distribute tax collections to hundreds of state and local governments is a legitimate complaint about the coming system. But I suspect the ingenuity of American business  will spring to the rescue  with the development of services that will handle the chore for you. Come to think of it, who would be better able to use its cloud computing expertise and vast knowledge of state and local tax regulations to provide such a service than Amazon?