Why should the Internet be tax-free?

Why should the Internet be tax-free?

Summary: Maybe it's unfair to expect Internet services like Airbnb to collect hotel taxes, but then why should Hilton or Sheraton have to? It's just like the Internet sales tax problem. Happy holiday shopping season!

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Would it be bad policy to force charging sales tax on the Internet? Maybe. Is it bad policy that Intenet merchants get a free ride? Absolutely, and it's clearly unfair.

There are a few common arguments against Internet sales taxes. First, the one with which I agree: Such taxes would depress economic activity. Of course they would, supply and demand being what they are. The problem with that argument is that it works just as well for brick and mortar retail. Why is it so much worse to depress Intenet sales than brick and mortar sales?

The right thing to do is to broaden the sales tax base by adding Internet sales, and then to lower rates. In the real world, of course, they'll just add Internet sales taxes and celebrate the increased revenues. But this doesn't negate the fairness issue. To quote my colleague David Gewirtz's parody of people like me, "Waaaaah! It's not fair!" David can dismiss the fairness issue, but I haven't heard him address it.

David cites some of the other arguments against such taxes. He mentions both the complexity of various rates and jurisdictions and the complexity of reporting. He dismisses the collection complexities as solvable but argues that the reporting problems are ominous. I don't understand his distinction and I see them as the same thing. The solution to them would have to be part of any national resolution of the Intenet sales tax problem. To get an idea of the complexity of taxes in different jurisdictions, see this short report from the Tax Foundation.

What is needed is one or more Internet interstate tax clearinghouses. These organizations would provide merchants with rate information based on zip code and perhaps other parameters. They wold also manage sales tax accounts for the merchants and file reports. In order to collect taxes under the national agreement, states must agree to work through a clearinghouse; probably there needs to be some certification process for it. And the states should pay for the service through a commission on collections. Considering the result will be easy money just pouring in (all reporting and payments will be electronic), they should be happy to pay a small commission. Eventually even brick and mortar retail may want to go through the clearinghouses.

In fact, there is already a business called the Sales Tax Clearinghouse. They provide data and software for merchantts, although their software looks primitive. It's the germ of the right idea, but it doesn't go far enough.

Another argument I've heard, although David doesn't make it, is that brick and mortar retailers use more of the public services that sales taxes pay for. I dispute the truth of this assumption and await some actual data or analysis behind it, but even if it were true it's irrelevant. The retailer doesn't pay the tax, the consumer does. The retailer merely collects it and passes it on to the state.

Incidentally, it's not just sales taxes as such. In many jurisdictions, hotels, and even dinky little bed and breakfasts, have to collect and submit hotel taxes. Airbnb, an interesting service that lets people rent out rooms to visitors over the Internet, doesn't collect these taxes. The state of New York isn't happy about this. Same deal: Maybe it's wrong to make Airbnb collect these taxes, but why is it any worse than making the Sunny Side-Up Bed and Breakfast collect them or, for that matter, Marriott? Fundamentally though, hotel taxes are just sales taxes at a special rate, so they shouldn't be a big deal for software to handle.

There's another aspect to this which usually goes unaddressed: Say you buy a computer online and have it shipped interstate to you. If your state has a sales tax and the retailer doesn't collect it then YOU are supposed to pay it to the state. It's called "use tax." There's a line for this on your state income tax form. Many real businesses actually track and pay this (or so my wife the accountant tells me). And I know about it from annoying personal experience. In 1987 (or thereabouts) I bought a Compaq Desqpro 386 from 47th Street Photo in New York City and had it shipped to my place in Philadelphia. "Cool, no sales tax" I thought. A year or two later I got a bill from the state of New York for the use tax, apparently following an audit of 47th Street Photo.

I actually consider myself something of a libertarian. I don't think all taxation is theft, but taxes and government in general should be kept as small as we can get away with. The only thing worse than taxes that are too high are taxes that are inconsistantly applied.

Sales.tax.combined.state.and.average.local.rate
source: The Tax Foundation (http://taxfoundation.org/blog/weekly-map-state-and-local-sales-tax-rates-2013

 

Topics: Government US, E-Commerce

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46 comments
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  • There's your problem...

    points to the map.

    Sales tax is a mess. In most other countries, one rate covers the entire country. Here, in Germany, every state has to charge the same, 19%, tax rate. There are no arguments about which rate is valid, the sellers or the buyers, because they are the same.
    wright_is
    • It's really not that challenging

      A 9-digit zip code database of tax rates and policies would not be a very large database. I can't vouch for its accuracy, but that Sales Tax Clearinghouse I linked to (https://thestc.com/) has sold this data for many years. In a legal regime implementing this nation-wide, states could be required to provide accurate data to the clearinghouses in order to participate. Participation would definitely be in their interest.
      larry@...
      • This is one of the things that computers do well

        The ZIP code will certainly give you the state/territory and the county. Cities/towns are a bit more problematic in that ZIP code boundaries often don't match municipal ones. Even so, these are data that a commercial service, or even the USPS could easily provide.
        John L. Ries
        • Exactly

          For example, Merchandise Mart in downtown Chicago has its own 5 digit ZIP code.
          benched42
      • But,

        How do you charge sales tax? Do you base it on the warehouse where the goods you just purchased reside? Do you base it on where the headquarters (or regional headquarters) of the company physically are? Do you base it on the state where you are at the time when you make the purchase? Do you base it on the state where you reside?

        It's all just another money grab so government can have even more to spend.
        benched42
        • The general rule in mail order...

          ...is that sales tax is charged in the jurisdiction where the customer resides. Congress could always allow states to charge import taxes on mail order goods, but I think the chances of that happening are almost non-existent.
          John L. Ries
    • Nah ... the author's problem is entirely different ...

      The author states that "[s]uch taxes would depress economic activity. Of course they would, supply and demand being what they are." Then he adds that "[t]he right thing to do is to broaden the sales tax base by adding Internet sales, and then to lower rates."
      Unfortunately, the author's second assertion ignores the premise of his first: government's continual intervention within a free market economy does nothing but perturb the system so that it must constantly adapt to such perturbations. Governments bring little benefit to a free market economy, and the nature of the people is to continually use its power of prosecution to obtain their own selfish desires. The altruism of mankind is a myth -- especially when the force of law is the blunt instrument to "legally" take what others earn.
      Just because the author thinks that we should "broaden the sales tax base by adding Internet sales, and then to lower rates," does not make such it "right."
      David A. Pimentel
      • You're ignoring the fairness issue

        Why should the sales tax burden fall entirely on brick and mortar commerce and none on e-commerce? Isn't this an instance of government giving an unfair competitive advantage to one set of merchants over another? Unless you want to argue against sales taxes in all cases, this isn't an issue you can just ignore.
        larry@...
        • Fairness?

          "Why should the sales tax burden fall entirely on brick and mortar commerce and none on e-commerce?"
          The brick and mortar commerce doesn't pay the sales tax, the consumer does. Excise tax is paid by businesses, but usually passed onto consumers.

          Also, not all e-commerce is equal. In my state, on-line purchases, like Walmart, Best Buy, Apple and others, consumers are charged with excise tax (our sales tax does not exist, i.e. zero) because they have brick and mortar presence in our state. As soon as you put in your shipping address, the tax is already calculated. Others, such as REI, Cabelas don't have stores here and thus there is no excise tax.

          Although you say that zip codes could be used, but you need to take into account that some states that have some items with no sales tax, like medicine some food items, etc. Making the tax calculations way more complex than just zip codes, you also need to know the items per zip code. Another point is that different municipalities levy taxes differently, so city, town, villages can levy additional taxes. Our state has no exempt items and a certain percentage of the excise tax is given to the cities and counties based on location of sale (i.e. city excise taxes are built into the state excise tax - so our state tax is actually lower than stated in charts but looks higher because of the city portion). Now, you're thinking that in store registers need to have that calculated, but all the variations, including brick and mortar, may decide to pay some taxes themselves instead of passing it onto the customer. You're probably thinking that I am intermixing or confusing the differences between excise and sales tax, but from the consumer point of view, they are a tax burden in the same way, passed onto the consumer.
          ManoaHI
      • Even if it were possible...

        ...to completely deregulate economic activity (which I think is a Randian fantasy, but what do I know), governments would still need to maintain public order, defend their territories, and arbitrate disputes, so taxes would be required, regardless.

        And even hard core statists would (all things being equal) rather pay lower taxes overall than higher ones, and would prefer taxes that are easy to collect to taxes that are hard to collect.
        John L. Ries
    • Welcome to federalism

      It's surprising that each German state charges the same sales tax, but I suppose it's easier to get agreement among 16 states than among 50 (plus 6 territories). Somehow, I suspect that Swiss cantons (for example) have a lot more flexibility than that.
      John L. Ries
      • Re: It's surprising

        This is not surprising at all. Germany is still one country with one tax law etc.

        There is bug in the system though, as being an EU citizen in another country, where the VAT is 20%, I do pay 1% less if I buy from Germany.
        danbi
        • Germany is a federation...

          ...not a unitary state. With the exceptions of the Nazi regime and the Communist GDR during the Cold War, that has been true since 1870 (the Empire, the Weimar Republic, and the Cold War Federal Republic were all federations). This implies divided sovereignty, to include the federation and the states each having its own taxing authority.

          That's why I was surprised.
          John L. Ries
          • Feds

            are responsible for tax and make federal law, the states have their own collection agencies and enforcement agencies and they can make local laws, public holidays etc.

            Having federal tax laws make it a lot easier.
            wright_is
  • And the map is incomplete.

    Each county, town, and village can/does have its own tax rate.

    "Tax clearing house" my eye. Out of the millions of tax rates, each one changing at least once a year or so, means NO "clearing house" will ever be valid.
    jessepollard
    • Please click on the link for Sales Tax Clearinghouse

      They include State, County and Town/City rates for both sales and use taxes.
      They can also provide monthly updates.
      Not sure what your argument is.
      You make it sound far more complex than it really is.
      thekman58
  • Sales tax should only be for the location the business is operating from.

    First of all, there are two types of sales taxes; the sales tax, and the use tax. The one levied by the person's state or local government on all purchases by that person that were not levied a sales tax at the point of purchase is considered a use tax. The other, a tax levied on all sales at that business by the government, but collected and sent to the government on behalf of the purchaser, is a sales tax.

    Example: You purchase furniture for your Massachusetts business or residence from an out-of-state firm (say, from New Hampshire - zero sales tax) and pay no Massachusetts sales tax (6.25%). You are required to pay the 6.25 percent Massachusetts use tax. The use tax applies because the furniture was not subject to a sales tax in the other state and because it is for use in the Commonwealth.

    Let's face it, most people never pay a use tax unless they absolutely have to. The burden of complying with it outweighs the risk and penalty of ever being caught violating it; with some big ticket exceptions, such as automobile purchases.

    In fact, some companies have point of sale or pickup points in New Hampshire specifically to sell without a sales tax to New Hampshire residents, even though the store is based in a sale tax state.

    The reality is, a sales tax is the first level of a Value Added Tax; which is a lie, as no value is ever added to an item by taxing it.
    Dr_Zinj
    • OK, BUT

      Do you tax it at the rate where the company's headquarter are? Or do you tax at the rate where where the company's manufacturer is? Or do you tax it at the rate where it is delivered from/warehoused?

      The company I work for is based in Iowa but we have manufacturing facilities in Georgia, New York, North Carolina, Minnesota, Illinois and even China. We have warehouses in quite a few other states. At what state's rate are they taxed?
      benched42
  • Its a legal problem

    First, just because tax isn't collected at the point of sale does not mean the item is "tax free". If I purchase a car out of state, I still need to pay the taxes TO MY STATE. Its just that the out-of-state seller doesn't need to collect it.

    Second, IT'S ILLEGAL. The US Constitution prohibits the FEDERAL government from establishing, or attempting to enforce interstate taxation. Yes, a constitutional amendment could be made, but really, do we want to go that far?

    Sales tax is not the reason people buy on-line. If the cost of an item was simply the amount of the tax, retail sales would still be booming. The cost to ship is usually more than the tax so all other things equal, the retailer's would be the better deal. No, its not a sales tax issue, its a bottom line price issue.

    Third, the added cost of collecting sales tax (and there WILL be additional costs) will simply be passed on to consumers. So doing the State's job for them will increase the cost of goods for everyone.

    If the states think they need to recapture sales tax, then they need to find a better way to collect the tax that is ALREADY OWED from out-of-state purchases. This is a job for the STATES, not the private businesses.

    Really, how much more government do you want? Why not just hire a bunch of people to live in everyone's home and watch what they do so NOTHING slips by the tax man? Just think of all the new jobs government would be creating all funded by .... humm, maybe big government isn't such a good idea. GET A CLUE, please.
    ccs9623
    • missing the point

      The Federal Government wouldn't be enforcing anything. It would just be creating an interstate compact. Many of these already exist in the form of port authorities, etc.
      larry@...