Congress Should Say ‘No’ to Internet Tax Hike

Voters are still reeling from tax day in a tough recession, and taking to the streets in protest, but state governments and their allies aren’t listening. In fact, they are gearing up to squeeze more money out of the nation’s workers. Their target is online shopping, and if the pro-tax coalition gets its way, embattled Americans will soon be shouldering higher tax burdens.

Senator Mike Enzi, R-Wyo., and Representative Bill Delahunt, a D-Mass., are set to introduce a bill that will allow states to collect more sales taxes online, according to recent reports. State claims on Internet sales are not new — the debate has been going on for about a decade. The key issue surrounds whether or not states should be allowed to impose taxes outside their borders — an idea that sounds a lot like taxation without representation.

States complain that they are “losing” revenue because their residents are shopping electronically in other states, but such a claim is an assault on important American principles that were upheld by the Supreme Court in 1992 when it ruled that a business doesn’t have to collect a state’s sales tax if the business doesn’t have a physical presence in the state.

Use Tax, Anyone?

States can and do collect the taxes they are grumbling about losing. That’s because residents are supposed to report to their state governments the amount of goods they purchased outside the state, and when they do, they pay what is called a “use tax.” Many reading this article probably reported use taxes on their return this April. States argue that this method is too difficult, but if that’s the case, there is another way they could collect tax that does not require reaching beyond their borders.

Under an “origin based tax,” states could choose to tax all e-commerce that occurs within their borders — essentially what happens in the brick-and-mortar world. That is, when someone crosses the border and shops at a store in another state, they pay that state’s sales tax. The benefit of an origin-based tax over the scheme to make state taxes follow residents wherever they go, is that it would preserve American principles of federalism and tax competition.

Of course, states don’t seem interested in the origin-based option, since such competition would keep their greed in check. Instead, tax-hungry politicians are pushing Congress to overturn the Supreme Court’s decision and hand them a license to collude with each other to ratchet up taxes evenly across the country — an outcome that would significantly shift America away from the federalism that has been a major part of the country’s success. Representatives of the Streamlined Sales Tax Project are planning to lobby members of Congress in Washington on May 13, but despite the rhetoric, their plan does not make taxation simpler or more streamlined.

Tea Party Message

“The states are desperate for new revenue, and I think they realize they’re straying far from the simplification they originally promised,” Steve DelBianco, executive director of NetChoice, a coalition of tech companies, told Cnet. This, he says, “creates an urgency on their part — to get the federal mandate before it becomes clear they have no intention to simplify.”

States are “desperate for new revenue,” as DelBianco said, not to offer taxpayers any new services or benefits, but to repair a fiscal mess largely of their own making.

With a Democratic Congress and president already spending tax dollars as if such money grows on trees, some think it might be easier to persuade Congress to allow states more taxation authority. Such a move would be a huge mistake, however, as new taxes will make it harder to recover from the recession. It would also be especially harmful since the new tax authority targets the tech sector — an area of the economy still performing relatively well.

There were 578,000 tax day tea parties where citizens gathered to voice their opposition to out-of-control spending at all levels of government, according to Americans for Tax Reform. Whatever their party affiliation, members of Congress should take heed and say “No” to state tax collusion.

Sonia Arrison, a TechNewsWorld columnist, is senior fellow in technology studies at the California-based Pacific Research Institute.


  • Sonia,

    Do you have any information about the bill now? has it been introduced? are there other sponsors? can you tell me more about the bill language? any updates?



  • I tend to oppose the Streamlined Sales Tax Project for two reasons.

    First, I AM personally selfish and do not like paying taxes. (Which is more than a little ironic since I AM a strong proponent for AZ raising both sales and income taxes to solve our current budget disaster. But this is another lengthy discussion.)

    Second, having read through the materials on the Project’s web site, I fail to find the simplicity that Fetrow describes. It would be nice if you are correct (Fetrow), but I AM not convinced you are.

    My solution would have the states resolve the issue by pushing for a VAT (Value Added Tax) which is a much more equitably applied taxation than sales tax and for which there is proven software in common use to manage.

    The principal problem the individual states have with the VAT is their concern about ‘getting their fair share’. A rational, but not insoluble concern.

    I suggest we add the VAT collections to the Federal tax revenues and adjust Federal Income Tax rates to offset the VAT collections.

    Let States abandon sales and use taxes in favor of Income Taxes. If based upon a percentage of Federal taxes paid, it is both simple to administer and reasonably fair.

    Now that I have opened Pandora’s box, I shall retire from the field…

    Combined with

  • You have the taxation without representation example exactly backwards.

    If the tax is collected based on the location of the BUYER, a destination tax, it is NOT taxation without representation as you wrote. The tax is based on the rate set by the legislators where the buyer lives, so if he doesn’t like it, he can lobby them, or vote them out.

    If the tax is collected based on the location of the SELLER, a origination tax, it IS taxation without representation because the buyer has no say in the tax rate. He cannot vote them out. AND, if the tries to lobby them, they have absolutely no reason to listen or care.

    Now that we have computers, it is very simple to collect the tax, and with the Internet, it is easy to report it, unlike how it would have been 20 years ago.

    For single rate states, like Virginia and Maryland, or even Delaware with their rate of zero, it is very easy. But even in multi rate states like Nevada, it is simple to collect the sales tax based on Zip Code, as the proposed legislation suggests. The proposal even takes care of those rare cases where a Zip Code covers two counties (or other jurisdictions) with different tax rates, the computer program automatically collects the tax at the lower rate.

    The proposal funnels the tax through the federal government, so the Internet retailer only has to fill out one return, like the brick and mortar retailer, except that he will do it online, where most states still do it on a paper tax return.

    This is not just about collecting more tax for the states. In a fair and honest world, people would properly put unpaid on their state income tax form and pay it anyway. Having all taxes collected is about fairness to those who run retail stores.

    It is long past time to level the playing field. Internet retailers already have the advantage of not having to run a store open to the public.

    Because of this, they can locate off the beaten path, in much less expensive space. They don’t have to have items on display, and they don’t have to have sales people on the floor to answer questions about the products. They also have MUCH less product damage, and NO SHOPLIFTING. Since the public is not in their warehouse, they don’t have the risks of "trip and fall" lawsuits, and they have greatly reduced security expenses.

    The brick and mortar retailers not only have higher expenses from having that store, they also have to compete — in the consumer’s mind — on price because of the Sales Tax.

    I recently purchased a $6,000 camera body locally. The 5% Sales Tax added $300 to my final cost. I would have saved AT LEAST $300 by buying online.

    I, however, want to see my local camera shop stay in business, and I won’t break the law by not reporting the purchase and paying the tax in May anyway (May 15 is tax day in Virginia).

    Thankfully, the bill before Congress has it right.

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