Why should the Internet be tax-free?

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.