Should the Internet be tax-free?

Summary:Nothing's certain except death and taxes? Ben Franklin never considered the Internet.

David Gewirtz

David Gewirtz

Yes

or

No

Larry Seltzer

Larry Seltzer

Best Argument: Yes

64%
36%

Audience Favored: Yes (64%)

The moderator has delivered a final verdict.

Opening Statements

Will hurt far more than help

David Gewirtz: There can be no doubt that an Internet sales tax would be damaging to everyone: consumers, vendors, and even states. There are five key reasons.

One: in a tough economy, it doesn't make sense to force a 4- to 12-percent price increase on consumers. Two: tax revenue won't go up. Sales will simply go down. Jobs will be lost. Three: rather than more money going to local companies and state treasuries, people will simply spend less. Four: filing sales tax returns to thousands of individual jurisdictions will push small online retailers out of business. Five: many small online retailers are actually local stores, who will get further pushed out by large players like Amazon.

Bottom line: Taxing Internet sales will hurt far more than it will help. No one would benefit (not even Amazon). No one would win. It’s a bad idea.

See also:

Bring sales tax fairness to the Internet

Larry Seltzer: As a general rule, most people won't defend using tax law to advantage one business over its competitors. Yet this is a central feature of commerce today. Buy an item in the store down the street and you pay sales tax. Buy it from a business in another state and you may not have to. This is unfair to brick and mortar businesses and serves no valid policy objective.

Decades ago, the Supreme Court found that businesses couldn't be required to collect out-of-state sales taxes because it would be a complicated burden. This finding is obsolete. A system to make it easy for businesses engaging in interstate commerce to collect out-of-state sales taxes could be simple to use and little or no cost burden for the merchant.

You don't like the idea of raising taxes? Me either. But the fairness issue remains. Addressing it by creating a system in which all businesses are treated equally is the right thing to do.

The Rebuttal

  • Great Debate Moderator

    Welcome back

    This week's Great Debate tackles the issue of Internet taxation. David Gewirtz and Larry Seltzer will be the combatants. Ready guys?

    Posted by Larry Dignan

    I'm ready

    Fire away.

    David Gewirtz

    I am for Yes

    Go

    Let's get this mess straightened out.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    States' rights

    The argument around taxes and e-commerce revolves around a) fairness and b) taxes suck. Are there other nuances regarding Internet taxes that the masses miss? To convince me one way or the other I need a few more points to ponder.

    Should states be allowed to tax outside their jurisdiction if a company doesn't have facilities in that state?

    Posted by Larry Dignan

    No

    This can quickly become a very sticky Constitutional issue. Article I, Section 8 gives Congress the power to collect taxes, but does not assign that right to individual states. Amendment X of the Bill of Rights states, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

    Where this gets particularly challenging is (a) out-of-jurisdiction taxes become an interstate issue, which increases complexity almost immeasurably, and (b) it quite possibly falls under another Article I, Section 8 clause that requires  "all Duties, Imposts and Excises shall be uniform throughout the United States." All three of those terms can be applied to taxes. Let the litigation begin.

    David Gewirtz

    I am for Yes

    Yes

    It's closely related to the fairness issue, but I would argue that taxing one form of retail commerce and not others is a form of favoritism in government which is inherently corrupt.

    On the "taxes suck" angle, it's undeniably true that sales taxes are regressive in that they apply less to the rich than to the poor, but this is as true of sales taxes at the grocery store as on Amazon, so ultimately I think it's irrelevant.

    While there have been changes in constitutional interpretation of the Commerce Clause, particularly with respect to the health care law, in this case we are discussing exactly what the framers of the Constitution had in mind when they wrote (Article I, Section 8, Clause 3):

    [The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes;

    And I'm not necessarily sympathetic to it, but there's the state revenue issue. States want/need money to spend.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Giving Amazon a free ride

    Internet companies are no longer startups that need a jump start. Why should a company like Amazon not have sales taxes associated with it?

    Posted by Larry Dignan

    It's about the economy

    Well, all Internet companies aren't startups, but there are new Internet startups coming online every day. Amazon should have sales tax associated with it. If you live in Washington State and buy from Amazon, you should pay sales tax for your purchases.

    But this is less about Amazon and more about the American economy. Any economist will tell you that as you increase taxes, consumer spending goes down. In a down economy (and we're still in the doldrums), if we start taxing Internet sales, then we'll simply see less spending. As a result, companies of all sizes will suffer, consumers will pay more, and the states still won't see much of a benefit, because while they might get some sales tax, they'll also be spending as the ultimate safety net for those employees of former Internet companies now out of work.

    David Gewirtz

    I am for Yes

    It's a tax on the consumer

    In the cases we're discussing, either the customer or the merchant is in the state doing the taxing. I don't see why one is more worthy of taxation than the other. But the important point about sales taxes that often gets missed is that it's the customer that's paying them. Look at the receipt. It's a tax on the consumer for doing business with a merchant in that state.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Who benefits most?

    Are brick and mortar retailers really at a disadvantage vs. online retailers on the tax issue?

    Posted by Larry Dignan

    Brick and mortars

    That depends on the business strategy of a brick and mortar retailer. The fact is, every online retailer is a brick and mortar retailer. Amazon's fulfillment centers are gigantic, physical buildings. Every single online retailer that sells a tangible good needs a place to warehouse it and ship it.

    This gives traditional storefront retailers an advantage, because they can showroom their goods locally, use their showrooms as warehouses, and also ship online. If a retailer doesn't have a strong online presence, that's not the fault of the tax system, that's bad management on the part of the retailer.

    David Gewirtz

    I am for Yes

    Online retailers

    In the big picture of course they are. Customers know that in many cases they will pay less by using an online out of state merchant.

    There are numerous facts which complicate the matter: Online purchase is more likely to involve shipping costs, which may offset the tax advantage. A few states don't have sales taxes.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Standarization?

    Should online tax policies and legislation be standardized across states? The reality is that sales taxes aren't standardized anywhere. For instance, I'm from Delaware and still cringe every time I pay a sales tax.

    Posted by Larry Dignan

    If not - paperwork galore

    Well, once you start taxing across states, standardization becomes somewhat necessary, or we're going to be be subjected to a huge pile of virtual paperwork and excess complexity. Plus, as I mentioned above, Article I, Section 8 of the Constitution can be interpreted as possibly requiring standardization when you get outside a single state's jurisdiction.

    David Gewirtz

    I am for Yes

    Too many politics involved

    It would be a good thing. The specifics of sales tax implementation are political issues so you'll never get state legislators to surrender their room to maneuver by creating discount tax zones (usually in depressed areas to encourage commerce) or to fine-tune what items are subject to taxation. Much of the complexity of collection can be hidden by software though.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Effect on Internet innovation

    What are the risks that Internet innovation will be hurt by tax policies?

    Posted by Larry Dignan

    Hurt business

    As things cost more, people will spend less. The less they spend, the less successful Internet businesses will be (and, by the way, the less buying power consumers will have). It's a nasty cycle that nobody will win -- except for the attorneys, of course, who will bill at insane hourly rates to argue this for the next decade.

    David Gewirtz

    I am for Yes

    Raise costs but control prices

    Clearly uniform application of sales taxes would discourage e-commerce by raising the cost to the customer. This could discourage innovation by making business less profitable.

    It would, on the other hand, be good for brick and mortar stores, like book stores, which will be less likely to be undercut on price.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Your personal experiences

    Has the addition of sales taxes to many Amazon products affected your buying behavior? Why or why not?

    Posted by Larry Dignan

    Better service online

    Not particularly. But that's only for now. Amazon's new Interstate 4 distribution centers here in Florida won't be in operation for another year or so. After that, we'll have sales taxes to pay.

    That said, I like buying from Amazon and I'd prefer to be able to buy locally, but the stocking levels of local stores (of geek goods) is terrible. So I buy from online retailers. I'm more concerned with the quality of service from retailers. I often buy from the seller with the best overall service and sale offering.

    David Gewirtz

    I am for Yes

    Sticker shock

    I don't recall anything specific, but I look at the bottom line and I have noticed cases where, at checkout, an item was more expensive than I had expected. It's most likely that this would lead me to consider an alternative affiliate.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Buying habits

    Do think consumer buying behavior will be affected by Internet taxation?

    Posted by Larry Dignan

    You don't get beat up online

    Yes. We just went through Black Friday and the stories abound about shopper violence, simply to get the bargains offered. Most consumers, if they're not hurting financially, are certainly not affluent. As a result, the cost of goods they purchase matters quite a lot.

    Many Black Friday discounts weren't much more than five or ten percent -- in the same range of how much more it would cost to pay sales tax. Consumers will either buy less or shop around until they can find a tax-free or lower price. Bank on it.

    David Gewirtz

    I am for Yes

    Price matters

    Certainly. Consumers are almost always influenced by cost.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Fix it, please

    If I gave you a magic tax wand, how would you fix the Internet tax issue?

    Posted by Larry Dignan

    Unleash a superhero - Taxman?

    Banish it to the Phantom Zone forever. I know, I'm mixing fantasy and superhero metaphors, but sometimes it takes superpowers plus a little magic to overcome the mistakes our government has made over the years.

    David Gewirtz

    I am for Yes

    Same tax for all

    I would say that all sales taxes should be applied uniformly to all types of merchants. But once the impact of uniform taxation is felt, states should adjust their rates downward to make the overall change tax-neutral. The combination of these two moves will make the system fair without, in the aggregate, punishing consumers.

    That first part doesn't necessarily require a wand. The second part probably goes against the human nature of state legislators who will want to pocket the new revenue to spend on breaks to favored interests.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Hurt SMBs?

    Does Internet taxation hurt small businesses?

    Posted by Larry Dignan

    Most definitely

    Most companies with dedicated bookkeeping or accounting departments (and most politicians) don't realize the massive load small business are put under by reporting obligations.

    Most small business owners don't have time to figure out all the requirements themselves, so they're forced to rely on outside professionals, and many of those outside professionals themselves can't keep up to date. Every hour spent filling out forms is an hour not spent running and growing a business.

    And then, add to that the complexity, the potential of making a costly mistake that might be penalized by the government, and the actual dollar cost and it's a brutal hit to small business.

    David Gewirtz

    I am for Yes

    Saved by software and the cloud

    All taxation hurts small businesses. Most of those brick and mortar businesses, whose customers pay sales tax, are small businesses too. But it's irrelevant. The issue here isn't small vs. large business, but in-state vs. out-of-state, and the rules apply to small and large business alike.

    There is a case to be made that the cost of administration would be relatively greater for small business, but as I suggest in my recent column on the matter, this complexity and cost can be greatly mitigated by software and cloud services.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Private, state and federal agreement

    Do you expect that the private sector, states and Feds can work out some fair treatment that'll make sense for all?

    Posted by Larry Dignan

    Are you serious?

    No, of course not.

    David Gewirtz

    I am for Yes

    It's possible

    I wouldn't say it's likely, but it's possible. This is an issue which invites blind, anti-tax demagoguery of the type that can effectively impede any solution, but there is bipartisan support for a solution. It's not going to happen in this Congress and probably not the next one either. Maybe after 2016.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Will it work?

    Last question: Ultimately, do you think Internet taxation can really fill the coffers of states meaningfully?

    Posted by Larry Dignan

    Absolutely not

    While there may not be anything resembling an Occupy movement against Internet taxation, it will simply be yet one more drag against our economy, reducing the buying power of consumers, putting companies out of business, costing hundreds of thousands if not millions of jobs -- and all that bad news eventually lands on the statehouse steps, needing additional attention.

    We need to grow our economy, not tether it to the ground and watch it crash.

    David Gewirtz

    I am for Yes

    It's a political necessity

    As I explained in my "magic tax wand" answer, I don't approve of this as a revenue increasing measure for states. It's likely though that it will be structured as one. Revenue for the states is probably politically necessary to get the support to pass any Federal bill.

    Larry Seltzer

    I am for No

  • Great Debate Moderator

    Thank you

    Applause. I think our debaters did a great job today and hope you enjoyed it. We'll post the closing arguments on Wednesday and I'll pick the winner on Thursday. Please read the comments and add yours. Vote!

    Posted by Larry Dignan

Closing Statements

We're better off without it

David Gewirtz

The first thing I'd like to say is that our readers truly added value to this discussion, contributing salient points that neither Larry nor I covered. A big shout-out goes to all of you for making this into a really meaningful roundtable discussion.

I disagree with Larry. We shouldn’t tax our populace and further damage our economy because of some misdirected desire to be “fair”. We also can’t give all little kids ponies, and we all don’t grow up to be princes and princesses. Life isn’t fair. Forcing fairness down everyone’s throats also isn’t fair.

This is really a two-part question. The first is whether to tax at all, and the second is how that tax process would be implemented. It's clear the Internet has been a transforming factor in our economy and encouraging Internet growth is good for all of us in the long term. But that growth is taking money out of the system as well, at the expense of already revenue-starved states.

If -- and this is a nigh-impossible if -- if Internet sales tax was consistent, universal, and easily manageable (none of which are government strengths), then it might make sense to implement it. But since there's virtually no chance that any sort of interstate Internet tax will be done with an eye to best practices before best politics, I contend we're better off without an Internet sales tax.

It's about fairness

Larry Seltzer

Many people seem to have a romantic notion of the Internet as existing outside of political boundaries. In a physical sense this may be the case, but in reality it is used and run by people who live and work in particular countries and states. These people and the companies they work for have to be subject to laws and by the same reasoning need to pay the taxes that people in the physical world do.

David's responses emphasize overall economic concerns over any sense of justice. His constitutional concerns seem misplaced to me. The federal government need not mandate anything to effect a more fair tax regime, but it might very well be authorized to do so as a regulation of interstate commerce.

For me this issue is all about fairness, and it's not fair that e-commerce is often preferentially taxed. There may be many good libertarian and pro-growth arguments for keeping taxes low and simple. There are no good arguments for taxing brick and mortar commerce but not e-commerce. My esteemed opponent has basically avoided the fairness issue.

Audience insight

Larry Dignan

If I had to declare a winner of this debate, I'd give it to the audience comments, which were insightful. Frankly, I see both sides of this equation; but on the basis of pure debate, David beat Larry with his arguments. The Internet isn't going to be tax free so here's to hoping there's some logical framework that's set up. 

Topics: Great Debate

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

zdnet_core.socialButton.googleLabel Contact Disclosure

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Related Stories

The best of ZDNet, delivered

You have been successfully signed up. To sign up for more newsletters or to manage your account, visit the Newsletter Subscription Center.
Subscription failed.