Congress Is Considering a Bill to Make Internet Firms Collect Sales Tax. Here's Why They Shouldn't Pass It.by Megan McArdle Apr 24, 2013 11:00 AM EDTI know you can already buy databases of all the tax rates in the United States, but I have no idea if there are complex systems that can accurate determine what is or is not taxable on a city, county, and state level. Some jurisdictions charge sales tax on clothing, some do not. Some charge only on certain types of clothing. Some jurisdictions tax clothing if the items cost more than a set price, while others tax on total dollar value of the transaction. The maze of rules and regulations on taxes is absurd.
It's too burdensome on businesses we want to expand.
Businesses in states without a sales tax will have to install a collection system that they currently don't need—and to pay taxes for services that they don't receive from faraway states. Yes, their goods travel on the roads, but the shippers are already paying tolls and gas taxes to cover the wear and tear. If we think those tolls and taxes are too low, the right response is to raise them, not impose a completely different (and much higher) tax. My colleague argues that they also use common services like the post office, but, of course, the post office is a nominally unsubsidized service that is paid for by postage and the occasional infusion of income from the federal income tax. Which those businesses are already paying.
We want small businesses to get bigger, spread their wings, engage in interstate commerce. The best way to do this is to minimize the amount of burdensome regulation that we put on them. No, the Internet sales tax will not, by itself, shut down some aspiring small-business owner. That's not the problem with regulation in this country. The problem is death by a thousand cuts (and 9,000 jurisdictions). Any individual regulation can be justified as a small intrusion. But put them all together and they are a very large burden … enough to bleed a promising business dry.
Now, if you want a single, flat, low sales tax rate, that might work — if every state would agree to the rate. But, we have another problem Congress has to address:
Article I, Section 9 of the U.S. Constitution includes the following:
No Tax or Duty shall be laid on Articles exported from any State.
That's why states assess, but rarely manage to collect, "use taxes" for items purchased online. You cannot tax items at the point of export, legally. I'm certain the courts will find a way to allow cross-jurisdictional taxes, but right now the courts have limited sales tax compliance to organizations with physical presences in the jurisdiction.
Walmart might not like this, because they have stores in all states. Therefore, with a physical presence in California, Walmart must collect sales taxes as if a customer in California went to a California Walmart. But, a retailer with no presence in California doesn't have to collect sales taxes.
My wife and I live in Southwest Pennsylvania. We shop in Ohio often, and we've shopped in West Virginia. We constantly cross state lines — as do many Americans. We shop at a warehouse store in Ohio, because it has lower sales taxes and more selection (no ban on alcohol sales, for example). The selection and convenience matter more to us than the taxes, though. We aren't stopped at a checkpoint and asked for the difference between Ohio and Pennsylvania taxes. That would be reason enough to move a few miles into Ohio.
When we drive in these states, we pay gas taxes and tolls. We pay the Turnpike tolls because it is fast and convenient to drive the Interstates, instead of county roads. We pay our "fair share" with each trip. It isn't like we "steal" services from the two states.
Can you imagine retailers asking for an I.D. so they can charge the "appropriate" sales tax at the register? After all, Pennsylvania wants me to pay sales tax if I order online from a store in Ohio. Think about that. Buy in person? Pay Ohio taxes. Buy online? Pay the Pennsylvania taxes. That's just plain stupid.
While taxes don't alter our choices significantly in Western PA, when we lived in California, we compared the sales taxes from city to city, county to county. It made sense to buy large office supplies, furniture, and other items several miles from where we lived. If you're buying $10,000 in office equipment, the taxes are substantial — and worth a trip to the cheapest retailer in the cheapest county.
Our national leaders seem intent on making it impossible to operate a business. McArdle concludes her column with an illustration of this:
A few weeks ago I was talking to a very nice, very liberal wonk type who had tried to start a small business and come away with a changed vision of regulation. The most dispiriting thing, he told me, was that it wasn't even possible to know whether he was in compliance. He's a very smart guy with top-notch research skills, but if he'd spent all his time researching the rules, and none running his business, he still couldn't have been sure that he was legal.Imagine trying to comply with nearly 10,000 (yes, TEN THOUSAND) sales tax jurisdictions. A small business simply cannot afford such an expense — so they will need to "outsource" transaction processing to a company that can deal with the tax jurisdictions. (Can you say, "Amazon"? Yes, Amazon could be a big winner with this move, because they already have the infrastructure to collect taxes in many states.)
Tax law changes will not shift shopping from online to bricks-and-mortar stores, at least not for the most popular online items.
As I explained above, we are convenience shoppers — we want to get what we want. Limit our choices, we will go elsewhere, including online. My wife and I shop online for books, music, and some other items. We will shop online with or without sales taxes. There are several reasons, other than taxes, for online purchases. If we have to pay the same taxes, online or in person, the odds are that the online price, selection, and service will still be superior for some items.
We have one, yes, one traditional bookstore in our county and three used book retailers. The "new" books are in a little (and I do mean little) mall store that was once a B. Dalton. It might be one of the smallest retail spaces in the mall. I've never found a book I wanted in the store. There's no significant selection of history, science, philosophy, or art books. And forget finding new computer books. We can either order books online or shop in Ohio at the chain bookstores (with mediocre, but better, selections).
The bookstore in the mall is staffed by teenagers busy using their cellphones. When you do get their attention, the standard answer is, "We don't have that, but we can order it."
If I have to order a book, I'm ordering it online from Amazon. If I lived in California, I'd order from my wife's sister (she runs the family's new-and-used bookstore) and ride my bike to the store. We don't have a local store here to support, so Amazon wins.
The only beneficiaries of an online sales tax mandate will be large retailers and online service providers. The winners will not include small businesses on Main Street. If a small business does have online sales, it could be among the losers thanks to compliance costs.
Internet sales taxes are simply another dumb idea that will happen.