Why an Internet sales tax is such an incomprehensibly bad idea

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.
Written by David Gewirtz, Senior Contributing Editor on

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.

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