E-TAX

04.24.13

Congress Is Considering a Bill to Make Internet Firms Collect Sales Tax. Here’s Why They Shouldn’t Pass It.

It’s too burdensome on businesses we want to expand.

For years, states have been trying to collect sales taxes from Internet retailers, particularly Amazon. They’ve been stymied by a 1992 Supreme Court ruling, Quill v. North Dakota, which held that under current law, companies could not be forced to collect sales tax unless they had a physical nexus in the state: a warehouse, a production facility, or a sales representative.

(Fun fact: the defendant in Quill v. North Dakota was ... Heidi Heitkamp, then a state official, now the woman that Maureen Dowd thinks should have voted for tougher gun control because, er, she’s a mother.)

Now Congress is riding to the rescue, with a bill that will force Internet companies to collect sales tax on their transactions. My colleague Dan Gross is enthusiastically in favor. I’m ... less so.  

To be sure, there are reasons to like broader sales tax collections. Economists favor consumption taxes—which is basically what a sales tax is—because they are relatively efficient, and they may encourage people to save and invest more. If states can collect more revenue from Internet companies, they may rely less on income taxes.

There's also a question of fairness: local businesses are essentially competing with Internet firms that offer a 6 to 12 percent discount because they don't collect sales taxes.

But there are also reasons to be wary of forcing out-of-state companies to collect your sales tax. For one thing, it erodes the healthy tax competition between states and localities. Right now, the fact that it’s hard to collect sales tax from other states keeps those taxes to reasonable levels; they currently top out around 12 percent. If states and localities didn’t have that competitive restraint, they might well start to rise.

(And before those who want higher taxes cheer, take note: a 20 percent state sales tax would probably make it difficult for the federal government to impose a VAT. And without a VAT, most budget wonks think that in a decade or so, your favorite federal spending programs will probably have to take some deep cuts. It’s just not possible to fund a huge welfare state solely on income taxes. Functionally, high state sales taxes buy you generous pensions for public-sector workers at the expense of entitlements.)

Sales taxes are also regressive. My colleague points out that Internet consumers skew affluent, because you have to have a credit card. Sort of. The rise of prepaid credit cards is actually rapidly changing that, bringing even unbanked consumers online. Of course, the very poorest—the welfare mothers and people on disability—are not buying much. But those people don’t buy much anyway, since they generally have a cash income of less than $1,000 a month.

Besides, Internet consumers also skew young, and, of course, young people don’t have as much money.

But the biggest concern may be the burden this puts on small business. That burden is smaller than it was in 1992, because there is now software that can help you keep track of all the different regulations. But it remains a burden. Fifty states, umpteen localities, all of them with different rules not only about the rate of tax, but which items are exempt. This is a trivial problem for Amazon. But it is not trivial for small businesses that have to know, say, whether to categorize their cookies as a (usually tax-free) grocery item or a (usually taxed) prepared food.

Businesses in states without a sales tax will have to install a collection system that they currently don’t need—and to pay taxes for services that they don’t receive from faraway states. Yes, their goods travel on the roads, but the shippers are already paying tolls and gas taxes to cover the wear and tear. If we think those tolls and taxes are too low, the right response is to raise them, not impose a completely different (and much higher) tax. My colleague argues that they also use common services like the post office, but, of course, the post office is a nominally unsubsidized service that is paid for by postage and the occasional infusion of income from the federal income tax. Which those businesses are already paying.

We want small businesses to get bigger, spread their wings, engage in interstate commerce. The best way to do this is to minimize the amount of burdensome regulation that we put on them. No, the Internet sales tax will not, by itself, shut down some aspiring small-business owner. That’s not the problem with regulation in this country. The problem is death by a thousand cuts (and 9,000 jurisdictions). Any individual regulation can be justified as a small intrusion. But put them all together and they are a very large burden ... enough to bleed a promising business dry.

A few weeks ago I was talking to a very nice, very liberal wonk type who had tried to start a small business and come away with a changed vision of regulation. The most dispiriting thing, he told me, was that it wasn't even possible to know whether he was in compliance. He's a very smart guy with top-notch research skills, but if he'd spent all his time researching the rules, and none running his business, he still couldn't have been sure that he was legal. (This was a tame office sort of business, not a hazmat disposal firm.) Instead, he had to pay professionals and blindly rely on what they said. This was both expensive and demoralizing.

As a result, I have a very high hurdle when it comes to imposing new regulations on business: is it really worth adding to that burden? Trying to stop companies from dumping toxic waste in the river? Excellent idea. Trying to make it marginally easier for states to collect a small amount of revenue from businesses in faraway places? I just don’t think it passes the cost-benefit burden.