Three Cheers for the Internet Tax!

Like to buy stuff on the Internet? If the House approves a first-ever online sales tax, you might soon be paying a premium—and that’s a very good thing, writes Daniel Gross.

On Monday, the Senate approved a measure that would let states tax retailers based in other states when those retailers sell to their own residents. In other words, states may soon get the green light to tax e-commerce.

It’s about time.

Here’s why.

Governments are starved for revenue, particularly at the state and local level. We may be in a golden age of federal deficit reduction, but the federal deficit is still large. States and cities, which can’t run deficits, have been cutting jobs and spending across the board for lack of revenue. Since the beginning of 2009, states and cities have hacked 704,000 jobs. Levying sales taxes on Internet commerce would allow many states to tap into a new vein of funds.

Second, the Internet economy, e-commerce—whatever you want to call it —is no longer in its infancy. Rather, it is a proven business that no longer deserves or needs special treatment or protection. Just look at the Census Bureau’s data on e-commerce retail sales. In the fourth quarter of 2012, e-commerce retail sales were $59.6 billion, up 15.6 percent from the fourth quarter of 2011. (Total retail sales were up only 4 percent in the quarter from last year.) Total e-commerce sales for 2012 were estimated at $225.5 billion, up 15.8 percent from 2011, while total retail sales rose just 5 percent.

Every month, month after month, a bigger chunk of retail activity takes place online, and hence away from taxation (under current law, a state can only tax retailers that have physical stores or warehouses within its borders). E-commerce sales in 2012 accounted for 5.2 percent of total sales, up from 4.7 percent of total sales in 2011. Protecting e-commerce from state sales tax is like taking a substantial (and growing) chunk of earnings and placing it in offshore tax havens.

Some may argue that e-commerce shouldn’t be taxed because it has such a light footprint. We collect sales tax on retail sales in part because stores reside in communities, and impose costs on them. Walmart catches fire and the fire department responds. The police arrest shoplifters. Stores need parking lots, functioning streets, water, electricity, sewage and other public utilities in order to function. So their activity should be taxed to help pay for them.

Now, you can argue that e-commerce doesn’t impose any costs on the public or require any public investment—especially the type of e-commerce that involves simply zapping goods like tickets, e-books, or movies to customers electronically.

But wait. E-commerce retailers may have smaller footprints than big box rivals, but they impose plenty of costs and rely heavily on public investment. E-commerce is essentially a logistics operation. Companies ship goods via the U.S. Postal Service, a public agency that may have to be bailed out by taxpayers, or UPS and Federal Express, which rely on the publicly built network of airports, roads, and ports to function. All those delivery trucks rumbling around help cause congestion and create wear and tear that has to be fixed by public authorities. The e-retailers didn’t build the logistics systems and the infrastructure. The public did. In addition, the public has played a significant role in building the Internet, supporting and subsidizing the rollout of broadband, and allowing the spectrum to be used for wireless communications.

Finally, while sales taxes are regressive, you can make a pretty good case that taxes on e-commerce are progressive. Generally speaking, to buy stuff online, you need to have a bank account, a debit card, and credit cards. Those at the lowest rungs of the economic ladder, who tend to use only cash, aren’t logging on to Zappos to buy $300 stilettos. Those who have the wherewithal to shop online with greater ease and frequency have a greater ability to avoid sales taxes.