Why an Internet sales tax is such an incomprehensibly bad idea

Why an Internet sales tax is such an incomprehensibly bad idea

Summary: If the economy is to get stronger, charging consumers more when they're already struggling to afford goods and services is not a wise move. Even brick and mortars won't win. Here's why.

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It never fails. The only time both parties are willing to work together in Congress is when they're cooking up really bad ideas. If they've found a new way to cause trouble, reduce freedom, or generally damage the health of the nation, they work together just fine.

The representative system would work so much better if our representatives weren't such schmucks.

This time, the brilliant idea is taxing Internet sales. Oh, I know we've been down this road before, but this time there appears to be some traction.

CBS News: Senate moves closer to backing online sales taxes

Before I explore why an Internet sales tax is such a bad idea for our current times, I'll quickly summarize the reasons some factions are arguing in favor of an Internet sales tax.

Here goes: "Waaaaah! It's not fair!"

Okay, perhaps that's an over-simplification. There are two vectors to this discussion. The first is that traditional retailers have to charge sales tax, so they are effectively at a price disadvantage to online retailers. In order to level the playing field and give moribund brick and mortar stores a chance to live, we need to tax the upstarts.

The second vector is the actual truth though: Congress has so mismanaged America's finances that the states are going broke. The states desperately need a new source of revenue and Congress doesn't want it to come from the federal budget. So let the states add a new Internet sales tax, and voila! More money for the states and nothing out of the federal budget.

Congress gets to appear as if it's standing up for their local constituent interests, for brick and mortar traditional values, and for the states, all in one screw-the-public-and-the-economy blast of bipartisanship.

Brick and mortars are hurting. States are hurting. Why shouldn't Internet companies do their part to help out?

The answer is pretty simple: "It's the economy, stupid."

This is not a time to add a 4% to almost 12% price increase to the purchasing of goods. A tremendous number of people buy online, and by increasing their costs across the board, tax revenue won't go up nearly as much as sales will go down.

Here's how the economists look at it: Sales tax revenue is just one component of the overall economy; everything is interconnected. If sales tax income goes up, but overall tax income goes down because (a) people are spending less, (b) companies go out of business, (c) fewer companies start up, and (d) people lose their jobs, the net tax income will actually be less.

And that's just what will happen if we get an Internet sales tax. It will result in further damaging our economy while also causing the loss of jobs while also causing states and the federal government to collect less revenue, not more.

It's not just that consumers will buy less online if their purchases are taxed. It's that operating an online store that deals with sales tax accounting is a very non-trivial task.

There are 50 states, almost all of which have individual sales tax rates. Worse, there are hundreds (possibly thousands) of local tax rates across the country. For an online retailer to sell in an America with an Internet tax rate, sales taxes will suddenly have to be collected for all of these jurisdictions.

Even that's not so bad. Good shopping cart software can track rates based on ZIP code.

Where it gets bad is reporting. Filing sales tax reports for hundreds or thousands of jurisdictions, each with their own different forms and filing rules, can become incomprehensibly complex. Small online retailers won't be able to keep up.

Of course, the large online retailers, like Amazon, will have the IT resources to build out tax management into their systems. As a result, Amazon will get stronger at the expense of small online retailers.

Now, here's the biggest irony: Who are the small online retailers? In many cases, they're stores that have also set up shop on the Internet. They showcase their inventory, not only in their brick and mortar storefront, but in their online store as well. With complex, convoluted Internet-based sales tax in place, these local brick and mortars will have to close their online stores and concentrate only on local sales.

Amazon will once again be strengthened at the expense of local brick and mortars.

Now, don't get me wrong — I like Amazon. I probably buy more from Amazon than from any other retailer. But Amazon is not the U.S. economy.

If the economy is to get stronger, charging consumers more when they're already struggling to afford goods and services is not a wise move.

Well, I guess nobody has ever accused Congress of wisdom.

It's just so sad. It will be much harder for small online retailers to start, set up shop, and keep up with the paperwork demands. The one really strong growing sector of our economy will be nerfed and, really, no one will benefit.

Amazon won't really win because overall purchasing will still go down when an Internet tax is charged, consumers won't win because they'll be asked yet again to spend more, new startups won't win because the paperwork will be much worse, brick and mortar won't win because their online shops will be much harder to run, and even the states won't win because, ultimately, damaging the economy does not create more tax revenue.

Sadly, even Congress won't win because consumers will be more annoyed than they are now, and when consumers are annoyed, they tend to vote against the incumbent.

Talk about shooting yourself in the foot. Congress would do well to back away from this issue quickly and quietly.

Topics: E-Commerce, Amazon, Government

About

David Gewirtz, Distinguished Lecturer at CBS Interactive, is an author, U.S. policy advisor, and computer scientist. He is featured in the History Channel special The President's Book of Secrets and is a member of the National Press Club.

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111 comments
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  • I thought certain states DO have an internet sales tax?

    My memory on this is just a bit hazy. But I do recall that for certain items that I have purchased thru internet channels have charged sales tax.

    Is my memory wrong on this point?
    kenosha77a
    • I believe it's point-of-presence

      I think it's for point-of-presence sales, where the Internet retailer has a physical location in the state you're buying from. Not sure, though. Maybe someone could add to this discussion.
      David Gewirtz
      • No new taxes

        This bill does not create an internet sales tax, as the article implies.

        Currently, if a business, such as Best Buy, has a brick and mortar store in the state of residence of the customer, then the appropriate amount of sales tax is added to the customer's online purchase.

        The tax payer is supposed to list online purchases, made over the past tax year, when they file their taxes so that the taxes on those purchases can be added to the their tax bill. I can't imagine even 1% of online customers doing this.

        The bill forces the online retailers to add the tax regardless of a brick and mortar presence in the customer's state.

        So there are no new taxes created. This bill just enforces current law.
        Michael M Nelson
        • *edit

          The tax payer is supposed to list the online purchases made where tax was not paid. If the online retailer already charged the customer a tax, then it is not necessary for it to be claimed on the customer's taxes.
          Michael M Nelson
        • Not Exactly

          Michael, you're almost right but completely wrong.

          If a company has "presence" within a state then they must collect sales tax. Amazon doesn't have any brick and mortor stores but they do have many wharehouses in other states.
          To contend that this isn't a new tax might be technically correct but the impacts are that all online retailers will be impacted by taxes they didn't previously collect. The majority of online retailers are small one-man businesses (think ebay) and they will be forced out of the market for the reasons mentioned in the article.
          Scooter73
          • Not exactly true

            A one-man business only has to charge sales tax if they are actually a legit licensed business. Individuals selling to other individuals are not required to charge sales tax. If I want to go sell my tv on ebay, I will not have to charge sales tax for that pruchase.

            Also, I am not sure what you meant by your Amazon statement, but if Amazon has a warehouse, or any other offices, in your state, then they have to charge sales tax on your purchase. The law is if the company has ANY physical presence in a state, not just stores.
            rickgarrison
        • Regulation and complexity add costs to doing business

          The post buried the lead: higher cost to doing business in the form of complying with regulatory complexity suppresses economic velocity -- makes the economy grow more slowly. That is BAAAAAAAD for an already weak economy.
          maria.tseng
        • Absolutely Incorrect!

          You should really do some research before you spout "facts," when arguing against someone else. Currently, all online retailers that have a physical presence in the state the product is being shipped to (though some also include for the billing address so you cant just have it shipped elsewhere to avoid tax), must charge sales tax for the shipping/billing zipcode.

          As you stated, and as some others have stated, concerning reporting tax-free online purchases, that is not correct. The only place where you could report this is when you are filing your state taxes, not federal. But not every state has income tax, so you are not able to report these purchases on your taxes, because there is nowhere to report it. I live in Washington State, one of the first states to require sales tax for online purchases, and we are not required to report any purchases we make online. The sad thing is that just about every major retailer has a physical presence in this state, so there are very few online purchases that tax is not added to.
          rickgarrison
      • Didn't you research before writing?

        Seems un-David of you. Otherwise you normally write about stuff you are 100% on. Perhaps an overhaul of the article is coming? ...I hope so at least.
        ikissfutebol
      • It is also my belief.

        Based on my own experiences, it is only if the retailer has a physical location in the state will they collect sales tax. I know that in both Illinois and Wisconsin they have a line in the tax forms for one to enter the amount of sales tax they owe based on the total amount they have purchased online from non state retailers. Technically, that also applies to purchases you made from a brick and mortar business out of your own state. I highly doubt they actually collect much though. They would have to prove your purchases first.
        nuttygardener
        • Oops...

          I guess I should read though all the comments before I open my mouth, so to speak. Obviously this has already been pointed out. Sorry.
          nuttygardener
      • "I believe it's point-of-presence"

        Actually, David, the "point of presence" is how some states assess sales taxes on internet sales, but other states collect sales taxes on anything sold online whether or not the buyer live in that state. I know that Ohio does that (8% I believe) and at least a few others do it that way as well. I spend a lot on online purchases and no, I really don't want to pay sales tax on those purchases, but on the other hand, I hate seeing local businesses suffering because they sell only offline. I've owned 'brick-and-mortar businesses and losing sales because I charge the 5% tax doesn't really doesn't seem fair to me, so, if I have to start paying Virginia's 5% sales tax, then I will. I think the difficulty will be in determining what rate to charge nationwide- the higher rates such as CA, NY, Ohio, and NC, or the far lower rates in less wealthy states- I think that will be a major issue to decide.
        xplorer1959
        • Read the proposed law

          If you read the proposed law, it breaks it down like this:
          Based on the destination address.
          If the destination address cannot be determined, then taxes will be based on point of sale.
          If neither the destination address nor the point of sale can be determined, taxes will be according to the address listed for the method of payment.

          B&M stores collect state and local taxes based on point of sale. So, even out of state purchasers have to pay it. Most (note I did not say all) online retailers collect state sales taxes if they have a presence in the destination state. Collecting local taxes is a whole different bucket of worms.

          Not all states collect sales taxes. Among those that do, there is no agreement as to what gets taxed. The same is true of service taxes. There is no consistency within all 50 states and territories. Under the proposed law each community would have to provide a state "agent" with their tax structure, and that "agent" provide the various structures to the merchants. The programming needed to track all the variable would be a tremendous task for any online merchant.
          Webminotaur
    • PoP

      You are right David,
      If the store has a local retailer, supplier, or warehouse co-located in that state, they charge you online sales tax. A few exceptions to this are the PC makers such as Dell, who charge you a "fee" when you purchase a warranty plan or the like for one of their products either over the phone or online. I like reading your posts, because you actually make valid points and you seem to do a better job of not having gramatical errors in your writing...:D
      kw.cooper
      • Still not totally accurate

        Companies have to pay sales tax to the government. If they want to pay that for you or call it a 'fee', they can do so. Fill up your tank if gas. Does it actually most out all the taxes you are paying? No. Does the gas station still have to submit them? Yes.

        Technically, all "sales" require tax unless exempt (vary by state). If you buy from Amazon in Michigan or other location without a physical location, you are required by law to submit the appropriate taxes to the state. The issue is it isn't enforced. What the law would do is enforce it by having the companies liable for paying the tax and not the customer. It needs to be done as it is a massive loophole. I'm glad to see conservatives agree to closing a loophole, although it will affect tons and not just the wealthiest-probably why they agree.
        ikissfutebol
        • Ridiculous

          Companies do not pay sales tax whatsoever. The consumer does. Companies just send the tax to the tax man. Income tax is a flawed concept to begin with. Why exactly am I being charged a fee, or a tax, to SPEND money? Should it not be the BUSINESS that has to pay the charge because it is THEIR income? Why is it we get taxed on earning our money AND spending our money? And as far as loopholes being closed... How about we close the loopholes on these filthy rich $750,000+ a year tax shelters before we start to screw over the poor and middle class who are already struggling to make ends meet as it is in this absolutely horrible economy. This bill does nothing to help the consumers, only the governments. And it's a nightmare of paperwork to small business owners as well.
          TymonTheThief
    • Sales Tax charged in some States

      Whether or not you are charged State Sales Tax is a combination of where you live and the manner by which the merchant conducts its business.

      If the merchant is in the SAME STATE in which you live (or where the item is being delivered), State Sales Tax is charged. You can sum it up this way:
      Example #1 - Merchant is in WA where there is a State Tax, item purchased is delivered to a WA address, SALES TAX IS CHARGED
      Example #2 - Merchant is in WA, item purchased is delivered Out-of-State, NO SALES TAX unless the merchant has a physical presence in the State where the item is delivered.

      What gets Amazon PO'd is the potential lost sales of high ticket items. If, a Hi Def TV sells for $1,000 and you live in, say, WA State, Amazon will charge you about $90 Sales Tax. There are many merchants that sell at the same price as Amazon with Free Delivery and are out-of-state. By ordering from them, you save $90.
      Gretsch001
    • You are correct. If Amazon is shipping to you from a warehouse ...

      ... in your state, you may be subject to your state's sales tax. If not, you might not be charged sales tax at all. Different on-line retailers do it differently. Apple ships directly from their plant in China but I am sure Apple collects your state's sales tax.
      M Wagner
  • Never happen - taxes will go up and up and..

    Our government will never miss an opportunity to tax the masses and this newly proposed national (states) Internet tax is a prime example. I'm pretty sure this will pass unanimously (probably in the dead of night), mainly because State Government, Congress and our executive branch love to spend money. Right now, they don't have that money to spend, so let's look at other revenue avenues to make sure that cash can be acquired anywhere and everywhere.
    BruinB88
  • Sales Tax -will only compound things worse

    They keep forgetting that shipping adds to the price too. Once you add taxes, there might be less incentive to buy. Stores still have the impulse-customer service advantage.
    b_perlow