Yes, It's Time for an Internet Sales Tax

By Jordan Weissmann
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(Reuters)

As a rule of thumb, it's best to be skeptical of politicians and journalists who describe their pet policy preferences as "common sense." Unless it involves renaming a post office, pretty much any piece of legislation that gets brewed up in Washington will, by necessity, involve tough trade-offs between values and interest groups. 

But there are exceptions, and today, I'd like to cautiously suggest Congress has hit on one. The Senate is preparing to vote on a bill that would finally let states make online retailers collect sales taxes. Majority Leader Harry Reid has cued up a vote, and the measure is expected to have more than enough support to clear a filibuster.

So far as big pieces of legislation that will impact billions of dollars in commerce go, this bill might be the closest you'll get to a no-brainer.  Thanks to a 1992 Supreme Court decision, Quill v. North Dakota, states today can't force merchants to collect sales taxes unless they have a physical presence, such as a store or office, within their borders. Those tax dollars are still very much owed, but it's up to the shopper to pay them as part of their state return. Of course, almost nobody ever does. The upshot is that a ruling made back when Lands End catalogues were still at the cutting edge of retail has given online stores a leg up on their brick and mortar competition, while costing states a bundle of tax revenue -- anywhere from around $12 billion to $23 billion annually, depending on the estimate. 

And in time, it will cost them more. As the Census Bureau graph below shows, eCommerce has been taking a steadily larger bite out of all U.S. retail with each passing year. In 2012, it accounted for 5.2 percent of all sales, up from 4.7 percent in 2011. 

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Some might see a silver lining in all this. A conservative could argue that the less money we hand to the government, the better. A liberal could say that sales taxes are regressive, and letting the Internet erode them will force states to rely on more progressive income tax schemes.

But most Americans like smooth roads and safe streets. And outside a few royal blue corners of the country these days, income taxes are anathema to most voters. Practically speaking, there just isn't much upside to letting the web cut a growing hunk out of state budgets each year.  Nor is there a good reason to give online retailers a baked-in price advantage over businesses that operate and employ people locally.

Nonetheless, the current Senate bill has drawn some angry opposition. Its chief critics include hardcore anti-taxers like the Heritage Foundation and the Wall Street Journal editorial page, senators from sales-tax-free states including Montana Democrat Max Baucus and New Hampshire Republican Kelly Ayotte, and eBay, which benefits from its merchants being able to sell goods tax-free. None of their main qualms are particularly persuasive.

First, they argue, the bill would hurt small web businesses, which would be forced to deal with the logistical nightmare of collecting and remitting sales taxes to 9,600 separate jurisdictions. A behemoth like Amazon, which has lined up to support the bill in part because it plans on expanding its warehouse presence around the country and would be subject to taxes anyway, might be up to that challenge. But the cost and difficulty might sink your average mom and pop.

One could argue that since online retail is already dominated by large companies -- Amazon alone accounts for about 30 percent of it -- this really shouldn't be much of a concern. But we don't have to argue that here. Making noise about small business is a time honored tactic of politicians who are, in fact, not really interested in helping small businesses, and this instance is no exception.

For one, the Senate bill doesn't affect retailers with online sales under $1 million. Your average Etsy proprietor is not going to be forced to hire an expensive accountant to deal with onerous new obligations.

For another, the logistical challenges probably won't be that severe. The Senate bill requires each state to create a single online sales tax collector, or lets multiple states band together under one, to simplify the process. Meanwhile, software companies are already offering products that will properly collect taxes on the spot when shoppers make their purchases. Here's how the CEO of one such company described his product to BloombergBusinessweek:

TaxCloud is one of a handful of companies state-certified to do online sales tax collection, he says. His service meshes with Internet shopping-cart systems to add state and local sales tax charges to customers' checkout screens based on their zip codes. It does not cost retailers a cent or require them to memorize tax rates or remit funds, he says; the service is paid for by the states getting the tax revenue.

So in the end, we may well just be talking about tech firms working with a group of state agencies to keep their apps up to date. It won't be simple. But in the era of big data, it also shouldn't be too daunting.

Then there's the philosophical argument. Opponents of the bill say web retailers shouldn't be liable for taxes in states where they don't consume local services. After all, they note, without a storefront, you're not relying on having a police department on hand to arrest shoplifters or a nearby fire department in case of emergencies. Of course, this line of argument conveniently ignores the difficulty these companies would have shipping their products over state lines without functioning roads, bridges, and airports. 

And finally, there's the fear of unintended consequences. The WSJ editorial board, for its part, worries that the Senate, "cannot possibly force all the world's Internet businesses to collect local U.S. taxes," and so "instead of shifting sales from online to bricks-and-mortar, [it] might succeed in shifting them from U.S. online merchants to foreign ones." Maybe. Or maybe it would shift some amount of business to smaller online retailers not subjected to the sales tax requirements. Or maybe the U.S. would find a way to police million-dollar online retailers based overseas the same way we handle any other foreign corporation doing business stateside. The concern doesn't exactly seem like a bill killer. 

Ultimately, we're talking about a piece of legislation that would make relatively large businesses adopt some software to collect taxes that the law says are already owed, but rarely paid. In the process, it would make sure states don't needlessly lose much-needed revenue as eCommerce inevitably grows and that real-world retailers have a fair shot competing with their online counterparts. Again, this is as much common sense as you'll ever find on Capitol Hill. 

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A note for regular readers of the site: I've been guilty of insisting a few of my policy preferences on somewhat complicated policy issues were "obvious," which is pretty much the same thing as "common sense." Consider this a mea culpa, and a promise to be a bit better about it in the future.

This article available online at:

http://www.theatlantic.com/business/archive/2013/04/yes-its-time-for-an-internet-sales-tax/275185/