Why any Internet sales tax is a bad idea

October 24, 2011

Internet sales taxAs the holiday season approaches, shopping starts to be on everyone’s mind.

If you’re like many people, you may do much of your shopping through online retailers such as Amazon.com since no sales tax is collected from purchases thereon.

However, that may change in the near future.

That’s because two different bills have been introduced in Congress that would close the “loophole” preventing states from forcing online retailers to collect sales tax.

I put “loophole” in quotes because, despite what supporters of these proposals claim, that legal principle isn’t really a loophole.

The rule preventing this tax collection originated in the 1992 Supreme Court case Quill Corp. v. North Dakota.

Instead of online shopping, Quill deals with shopping through mailed catalogs and fliers.

North Dakota tried to force Quill to collect sales and use taxes from its North Dakota customers, and Quill sued.

The Supreme Court held 8-1 that North Dakota’s imposition on Quill violates the Dormant Commerce Clause, which is a constitutional rule that prevents individual states from imposing burdens on interstate commerce unless Congress explicitly grants them that authority.

And that is exactly what the two aforementioned bills are intended to do.

The first bill, the Main Street Fairness Act, was introduced on July 29 by Senator Dick Durbin (D-IL).

The Act would give states that have signed on to the Streamlined Sales Tax project* the authority to require retailers to collect taxes on out-of-state sales.

24 states would currently qualify, and many more would eagerly sign on given the prospect of collecting more taxes.

The other bill, the Marketplace Equity Act, was introduced in the House on October 13 by Representatives Steve Womack (R-AR) and Jackie Speier (D-CA), and is far more expansive in that it grants states unfettered power to collect sales tax from online merchants (with only a very minor small seller exception).

Many of you may be wondering why a Republican from a heavily conservative district in Arkansas would be supporting the imposition of a tax.

This is because this isn’t simply a typical tax debate often associated with income taxation; there are far more political and economic interests at play here.

Most notably, brick-and-mortar retail stores have been pushing very hard for this legislation for over a decade.

Why?

If people weren’t making tax-free purchases online, where would they be buying their stuff?

In person, at brick-and-mortar retail stores.

Coincidentally, the world’s largest brick-and-mortar retail store – Wal-Mart – is headquartered in Womack’s congressional district.

Of course, Congressional support isn’t only limited to those with major retailers as constituents (though it helps).

State budgets have been stretched to their limits and beyond with the economic downturn, and are desperately seeking new sources of revenue, which this tax could provide.

If you believe the spin by the tax’s proponents, though, this isn’t really a new tax.

And technically, it isn’t, since states currently require residents to report their online purchases for the purpose of sales tax collection.

Of course, almost no one knows this, and even fewer actually report this information since states have no real mechanism for enforcement (though not for lack of trying).

By the same token, some members of Congress, including Durbin and Representative Heath Shuler (D-NC), are actually asserting that these measures actually do consumers a favor by relieving them “of the legal burden to report…the sales taxes they owe on online purchases.”

Call me crazy, but I don’t think consumers will see it that way.

Without getting into a policy argument about taxation, the simple truth here is that additional sales taxes are always a bad idea in a weak economy, because they decrease consumer spending for groups with limited budgets (namely, the entire middle and working classes).

That, for starters, is why this is a bad idea, and why Congress shouldn’t even be considering it.

Of course, Congress hasn’t seemed terribly interested as of late in the health of the economy.

*The Streamlined Sales Tax project was created by several states to align their sales tax regimes and arose around the turn of the century in response to Congress trying to permanently bar states from collecting online sales tax.