A conservative review of the internet sales tax

· September 10, 2014  
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Much like the push for comprehensive amnesty and open borders, the internet sales tax is something that seemingly nobody outside K Street cares about, and to the extent that average citizens study the issue, they are vehemently opposed to it. Yet at the behest of large retail stores like Walmart, a number of Republicans have decided to agree with Democrats to make tax increases on online sales a priority, right before the November elections, of all times.

And as in the immigration debate, a number of lobbyist-oriented “conservatives” are packaging this proposal with misleading conservative rhetoric and arguments. Disingenuously naming their proposal the Marketplace Fairness Act, they assert that this is an issue of fairness and is free market-oriented because it treats physical stores and online retailers the same. They also shroud this in federalism, noting that the federal government is preventing states from attending to their own affairs. They deny that their bill would represent a tax increase, as they contend the taxes are already owed to the states.

However, when we approach this issue from the perspective of an average consumer and citizen, instead of that of a lobbyist, it is clear that the internet sales tax scheme is anathema to conservative principles on many levels and is particularly harmful in today’s political climate.

True fairness and free markets 

Proponents of the internet sales tax would have you believe that there is some anti-market scheme to treat internet retailers differently from brick and mortar stores. The reality is that there is no special interest of “online retailers.” The internet is a medium of communication, not a select industry. Any merchant can choose to sell products online or at physical locations, and indeed most retailers like Walmart have embraced internet commerce.

In this case, online retailers are in fact treated the same as physical stores. For example, if a company owns a store in the home state of the consumer, the company is required to withhold sales tax. It’s just that the logistics of the internet, similar to mail-order companies that got the Supreme Court’s ruling in the first place, offers no logical and fair way to collect sales tax across state lines if the company lacks a physical presence in the state.

One could rightfully disagree with the general structure of a sales tax – the notion that a business should serve as the enforcer for the state and collect taxes on the state’s behalf from the buyer. But that is how the tax works for brick and mortar stores. It is not directly levied on the buyer or directly imposed on the merchant; the merchant is required to collect it from the customer on behalf of the state. There is simply no sensible way to try to apply that to purchases made online. The Supreme Court rightly ruled in Quill v. North Dakota that an individual state has no power to directly tax or compel tax collection from citizens of other states. A business must be physically located in a state in order for that state to require it to collect sales taxes on the state’s behalf. This 1992 decision took place long before e-commerce became a factor in the economy and was certainly not an unfair “handout” to online retailers.

Furthermore, like any other choices in life, there are advantages and disadvantages to different business models. The logistics of the internet might make the tax burden easier for internet commerce, but there is the drawback of shipping costs. That is part of doing business, and with the advent of the internet, everyone needs to adapt and innovate to stay competitive. Indeed, Walmart is doing just fine. The internet has served as the great equalizer for start-up companies that lack the economies of scale to compete with the huge retailers. The notion that we need to raise taxes on online retailers in order to level the playing field on behalf of the Walmarts of the world is absurd.

The quintessential role of the federal government

The idea that states could collect sales taxes from companies in other states is against the founding ideals of our country. Far from representing a case of federal overreach, federal bans on internet taxation across state lines is the only proper use of the Commerce Clause of the Constitution.

As James Madison noted in a letter to Joseph C. Cabell in 1829, the “power to regulate commerce among the several States,” was “intended as a negative and preventive provision against injustice among the States themselves, rather than as a power to be used for the positive purposes of the General Government.” Accordingly, it is the proper role of the federal government to prevent states from burdening the people with an unaccountable cross-state tax cartel that can collect revenue from online retailers for 9,600 unique tax jurisdictions.

Hurting federalism and low-tax states

In their effort to impose a solution to a contrived problem of “fairness,” lawmakers would actually be tilting the playing field against online retailers in several ways, rather than flattening the rules. Even though physical stores are forced to collect taxes from everyone, they are only subject to the tax of the home state. So if they are located in a state with no sales tax or a low tax, they collect the lower tax, even if the customer is from a high-tax state.

Under the Marketplace Fairness Act, online vendors in a state such as New Hampshire would still have to collect the high rate of taxes of customers from California. So red-state companies will have to serve as tax collector for high-taxed blue states, thereby deleting the benefit of being in a red state and blurring the effectiveness of laboratories of democracy. It’s no surprise, then, that even Democrats from states with no sales tax are vehemently opposed to this scheme.

Onerous burden

This bill would also burden online businesses with the technicalities of establishing a tax collection system that would satisfy nearly 10,000 unique tax jurisdictions in this country. All states and many localities have their own rates, exemptions, and holidays. That is a recipe for killing jobs while raising the cost of goods. It’s for good reason that in 1992 the Supreme Court referred to such a scheme as a “burden” and a violation of due process. Big online retailers like Amazon are willing to shoulder this burden in return for driving smaller online businesses out of the market or into their own platform. In that sense, this is a consummate example for big government colluding with big business. It should be called the Amazon Enrichment Act.

The fact that most versions of the Marketplace Fairness Act include some sort of exemption for small businesses with revenue below a certain threshold is a clear admission that their proposal is too burdensome.

National sales tax

Collection, enforcement, and reciprocity of this tax would be so complicated that it would engender yet another fix in the endless cycle of government incompetence. The only way to effectively collect it would be with a uniform national sales tax. There is no question that the MFA would be the easiest way for liberals to leverage their much sought-after national sales tax – an entirely new revenue stream.

This is a tax increase

Proponents of the tax say that this is not a tax increase because it would merely enable states to collect taxes already due. But in reality, they are not collecting the tax. Why would we ever push for new revenue and a new stream of taxation that will totally disrupt e-commerce?  Why not force states to cut government spending instead of taking out more money from consumers? Since when did the conservative solution to fairness and economic growth involve raising taxes on some businesses? Let’s find ways to lower the tax burden on brick and mortar stores instead of raising them on online vendors.

Additionally, if states really feel that the revenue is due to them, why don’t they go collect it? They have the ability to enforce “use taxes,” a type of excise tax, on state residents who purchase products online. Alternatively, they can create a new sales tax directly levied on online businesses in the state. That would definitely be more practical, less cumbersome, and beneficial to low-tax states, many of which would be quite eager to attract online retailers to their respective states. Clearly, the governors pushing this tax lack the fortitude to directly raise taxes and instead want the federal government to bail them out and create a cross-state tax cartel, which voters of their state would have no ability to punish at the ballot box.


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Author: Daniel Horowitz

Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.