Taxing the Internet

Congress may finally close the “loophole” that allows people to avoid sales taxes by shopping online, the New York Post reports. While the issue has been bandied about since roughly the advent of the Internet as we know it 15 years ago, the dire straits state and local governments now face may force the issue.  Under proposed legislation, online retailers would be required to collect sales taxes (presumably based on ZIP code) for local governments.

JammieWearingFool is outraged at this “bi-partisan confiscation of your money” but, as Glenn Reynolds reminds us, “Technically this isn’t new taxation, as you’re supposed to pay “use tax” on things you buy online from out of state. (I do this). But most people don’t, and to them it will feel like a new tax.”

Quite right.  As much as I dread having to pay taxes on purchases made online, I’ve never really understood the rationale for exempting goods purchased online and thus giving a rather decided advantage to Internet sellers in preference to brick-and-mortar companies who invest in the community.

What I’ve always felt was odd about these proposals is that, if I’m buying something from, say, Amazon, why shouldn’t Seattle, Washington, which houses the company, get the money rather than Alexandria, Virginia, which is providing nothing?  When I buy a book from the local Barnes and Noble when on travel, they don’t send the taxes to my home jurisdiction.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Dave Schuler says:

    You’re right, of course, from a political or legal standpoint but whenever you start collecting taxes you weren’t collecting before from an economic standpoint is not different from a new tax. Collecting taxes where they weren’t collected before will reduce economic activity at the margins.

    Is raising taxes during a recession suddenly a prudent move?

  2. Floyd says:

    I agree with your last paragraph.
    The question is really point(place) of purchase.
    If you buy a product while traveling by car into another state, they generally collect the tax at the point of purchase for that local area.
    Logic suggests that if you buy a product while traveling to another state by Internet they would have that same arrangement.
    Here’s the kicker…. In Illinois, it is the law(largely unenforced) that if you buy a product, while in another state, for primary use in Illinois, you are required to send the State of Illinois the sales tax, based on your residence.
    This is generally only enforced when buying something requiring a title.
    So, If you are on vacation and buy a $10 Tee-shirt to wear when you get home, you are supposed to send the state 65cents.
    The real Question is predicated on whether your state sees you as a citizen or a subject.
    There are areas in which huge amounts of revenue are “lost” by people traveling(physically) across state, or even national boundaries to buy their clothing, groceries , etc,just to avoid the onerous taxes imposed by their state of residence.
    That should be an issue of competition, not sovereignty.

  3. PD Shaw says:

    When I buy a book from the local Barnes and Noble when on travel, they don’t send the taxes to my home jurisdiction.

    And when you buy a book from B&N on-line, the money goes to its headquarters in New York, the book gets shipped from a warehouse in Kentucky, and though none of the Virginia Barnes and Nobles had anything to do with the transaction, Virginia collects a sales tax.

    That’s because consumption is being taxed.

  4. Phil Smith says:

    The reason this hasn’t been done already is that compliance enforcement will be a cast-iron bitch, and generate costs likely in excess of the revenues generated from current sales taxes. As a result, sales taxes will have to go up – and if you think they won’t, you haven’t been paying attention.

    It’s one thing to monitor B & N; it’s another thing entirely to try to monitor every $5M business that may do business in your state once a year.

  5. FranklinTest says:

    As much as I dread having to pay taxes on purchases made online, I’ve never really understood the rationale for exempting goods purchased online and thus giving a rather decided advantage to Internet sellers in preference to brick-and-mortar companies who invest in the community.

    Plus there are the people who try things out in the physical store, and then go buy it from a virtual one. If anything, they should be taxed more.

  6. Rick Almeida says:

    If you buy a product while traveling by car into another state, they generally collect the tax at the point of purchase for that local area.

    True, but interestingly enough, last year I bought a car from a NC dealership, but only had to pay sales tax in my native SC.

    That’s particularly nice, because SC sales tax for automobiles is capped at $300.

  7. Floyd says:

    Rick;
    As I said earlier…

    “” This is generally only enforced when buying something requiring a title.””
    In Illinois, a car requires a title.
    I have heard, however that a car over 10 years old in N.Carolina, doesn’t get a title for in state use. I’m sure you would have to register a 10year old car in either NC or SC though, thus triggering the tax.

  8. just me says:

    This isn’t a new tax, it is just a requirement to collect taxes that were supposed to be paid but weren’t.

    Luckily enough for me I live in a state with no sales tax so it is moot for me, but I have a hard time getting outraged over this.

  9. gawaine says:

    The big problem in the early days of the internet was that it’s a pain to calculate sales tax rates based on residential addresses. It’s still a pain, but it can be lessened by paying rent to someone else to take the pain away.

    In some states, different buildings on the same block are in different sales tax locations, and school redistricting can cause changes that aren’t obvious. It isn’t always based on ZIP code, unless that’s going to somehow be enforced.

    Even if you can figure out what to charge, you may not know how to pay it. If you’re a small business selling to 1000 different people in the course of the year, do you really want to have to fill out a thousand different tax forms? (Not exaggerating, many counties used to require a separate sales tax form from the state form). Now, if you’re ever subject to paying Virginia sales tax, you need to file a monthly return, and subject yourself to occasional sales tax audits, even if you never have another sale in Virginia or if you sell products that aren’t subject to sales tax. At least you only need one sales tax form, though. You just need to break out sales by county.

    On top of that, you have bizarre “Sales Tax Holidays” that are often inacted with little notice and little concern for the complexity involved. If you’re a seller in Hawaii, how do you know that Virginia will have a weekend where shoes less than a hundred dollars are not subject to sales tax?

    Nowadays, you can get software that handles this for you, or sell through someone else and have them figure it out and pay the taxes for you. It still ends up disincenting you from starting a small business online.

    Is that a bad thing? Is it wrong to be more “fair”? Not taking a position on that, but I think there were good reasons aside from the preference of net vs. b&m to hold off on this change until now.

  10. Chris O. says:

    It will be interesting to see how they approach used goods. Considering so much business is done through ebay, Craigslist, and Amazon.

    best,

    Chris O.
    Referral Key
    “Your Trusted Referral Network”