January 18, 2022

Taxing common sense

The December issue of the journal of the National Conference of State Legislatures has a cover story titled “Can the Sales Tax Survive Cyberspace?” A more appropriate, though wordy, title for this well-researched and comprehensive piece would be “Can Common Sense Survive the Debate over the Sales Tax in Cyberspace?”

At roughly the mid-point in a three-year moratorium Congress placed on the taxation of Internet commerce, a congressional commission will report early next year on whether — and if so, how — to tax sales conducted over the Internet. If hearings held last week are any indication, the commission’s conclusions will be clouded by exaggerated claims and faulty thinking.

The Internet industry, and many in Congress who covet the industry’s expansion in their home states, assert that the on-line sales of goods and services is too revolutionary, too different from Main Street commerce, for the usual rules of taxation to apply.

State legislatures, governors and Main Street businesses object to the fuzzy logic behind that assertion. So should all who pay taxes, who work at Main Street jobs and who care about their communities.

The no-tax argument is rooted in the confusion that has existed for more than 30 years regarding the taxation of mail-order sales. In 1967, the Supreme Court ruled that states lack the authority to compel out-of-state firms to collect sales tax unless the firm has a physical presence in the state in question. In 1992, the court reaffirmed that decision, but added that Congress could authorize states to require remote sellers to collect sales taxes if Congress first set ground rules to simplify the collection process. It is unfair and unreasonable, the court rightly said, to expect merchants to keep track of the different state policies on what goods and services are taxed and what the tax rates are for the various states, counties and municipalities.

Congress, of course, set no such ground rules. The mail-order industry made it quite clear that voters would know who voted for this “new tax.” Given the slow and stable growth of mail order, it was a small, nagging problem that did not cry out for a solution. Now, with the explosive growth of Internet sales, it is a huge problem that must be resolved — it is estimated that state and local governments already lose $5 billion in revenue a year though remote sales and that could increase to $15 billion in just a few years.

Tough luck for state and local governments? Tough luck, too, for those who pay income and property taxes to those governments — the lost revenue will have to be made up from somewhere. This eagerness to trash the sales tax certainly comes at an odd time. It seems like it was just yesterday (it pretty much was) that the consumption tax, with its emphasis on ability to pay, was being promoted by conservatives and liberals alike as effective income and property-tax relief.

The flaw in the mail-order/Internet argument is that it is based upon the location of the buyer instead of the seller. In real-world retail, it is the location of the store — not the residence of the customer — that counts. That’s why a store in no-tax New Hampshire doesn’t tack on 5.5 percent for a Mainer on a shopping trip. Nor does it matter where the company’s headquarters is located. The fact that Wal-Mart is based in Arkansas has no bearing on the tax charged at its Bangor store. With e-commerce, the only real question facing Congress is where the e-store is located. It could be where the order is processed — the location of the sales clerk — or where the service or product resides before its final delivery to the customer — the location of the store shelf. Congress should pick one and let the tax accrue to the appropriate jurisdiction.

There are enormous issues of fairness here. Tax policy should not be a tool to influence buying decisions. Congress has no business gutting the tax revenue of the states. It takes a computer, Internet access and a credit card to buy on-line — sales tax must not be a burden only for those who can’t afford the start-up costs.

But the fundamental question that must be answered by those who would put bricks-and-mortar merchants, the building blocks of communities, at such a disadvantage to e-retailers is this: When you need a job, or property-tax revenue to fund local schools or a contribution to your favorite charity, where are you going to go — to taxdodge.com six states away or to Main Street?

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