Why Internet Sales Taxes Are Inevitable

Steve Wildstrom / April 25th, 2013

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?

 

 

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Rich

    Online purchasing has four advantages over traditional retailing:

    1. You don’t have to drive anywhere. Ten minutes on your computer and the item shows up at your door.
    2. You don’t have to hope the physical store carries the item you want, and has it in stock.
    3. Amazon has a far larger selection than any physical store can contain within its walls.
    4. Before you buy, you can get feedback from users on anything.

    Here’s what you find if you type various items into Amazon’s search function:
    Electric bicycles: 4,150 Results
    Tents: 27,940 Results
    Screwdrivers: 127,021 Results
    Shoes: 739,239 Results.
    Any retailer that sells 127,000 different kinds of screwdrivers and 3/4 million different kinds of shoes is serious.

    This article says “Amazon.com is threatening to devour traditional retailing.” That is correct, and physical stores will need all their imagination and every advantage they can conceive.

    • mhikl

      And the scenario carried to the extreme: death to local communities and crippling of the state, unemployment and eventually fewer commodities bought and sold if the mass of unemployed fails to support commercial economic life as we know it.

      • jfutral

        I try my best to be a local-vore, not just with food (coming from a family of farming history), but with most merchandise I purchase. All those people working at brick and mortar stores are my friends, family, and neighbours.

        Unfortunately, it is becoming harder (as most retail stores continue to restrict their inventory to things that move or turn over the quickest) and I am of a small, and probably shrinking, group of people.

        Joe

  • mhikl

    Nothing wrong with an even playing field. A federal VAT (value added tax) or GST (goods and services tax) like system would take care of discrepancies between states. One same tax, collected by the Fed and distributed back to the state might be a practical solution. Whatever happens, fair should be fair; otherwise local businesses are at such a disadvantage and that scenario has led to less tax to support communities.

    Aside: of the three levels of government, which has the most impact on individual citizens? Might not the noisiest and wealthiest government level be the least relevant in day-to-day life of the citizen? I suspect the lowest government and most accountable, local town, city and municipal government has the most influence on daily lives yet such receives a sliver of the grand tax pie. At least this is what Jane Jacobs seemed to suggest.

    Another question. Is shipping by mail subsidised by the post office or does it bring in an honest profit?

    • steve_wildstrom

      I have long believed a federal VAT to be a good idea, but on a political likeliness scale of 1 to 10, I’d rate it at about -5.

      The accounting of the U.S. Postal Service is opaque, but I believe they make money on parcel delivery. For a wide variety of reasons, including flexibility and hte ability to negotiate large volume discounts, Amazon and other high-volume shippers make little use of USPS. Most of the stuff I buy from Amazon comes either FedEx or UPS.

      • mhikl

        I suspected as much regarding USPS. A friend gets packages in Canada and it doesn’t come through the mail but by private currier, as well. The GST/VAT was a hard sell in my country but it was pushed through and, for the most part, has been accepted. Tax is never a favoured political idea as it has been so terribly exploited. Fair, honesty and taxation are not often found in a sentence together. Thanks for the info re your mailing system. So even in this the discount services do not support the structures important to society such as postal services.

        • steve_wildstrom

          FedEx and UPS are wonderful, but no substitute for a postal service. For one thing, they don’t serve every address in the country, a harder thing in Canada than the U.S.

          A few years ago I was in Jasper NP and needed to get a hard copy legal document quickly to Detroit. I was shocked to discover that neither FedEx nor UPS serves Jasper, which is not exactly the end of the world. I had take my document to a store in the town site, from which a Purolator courier would pick it up and take it to Edmonton, whence it could be shipped to Detroit. It cost about $100 and took three days. I still wonder if Canada Post and USPS might not have been faster.

Protected by Gerben Law