Should states tax Internet sales?

Sales tax an issue of fairness

By Mark Weisbrot

Washington — “Only the little people pay taxes,” said Leona Helmsley, the self-described queen of a luxury hotel empire in the 1980s.

She turned out to be somewhat wrong, and went to jail for tax evasion. But the Helmsley principle has been the dream of “tax reform” advocates for decades, and over the last quarter-century they have made considerable progress toward their goal. There is now a move under way to prohibit states permanently from collecting sales taxes on products bought over the Internet.

This would be one more step in shifting our nation’s collective tax burden toward those who can least afford to pay. Although Internet use is growing every year, there is no doubt that people who buy things over the Internet have a higher income on average than those who do not. So this would be yet another tax exemption aimed at upper-income groups.

It is important to emphasize this, because the Bush administration’s latest tax-cut was even more targeted at the richest Americans. This fact has been obscured by deceptive arguments from those defending the latest rewriting of our tax code. They claim that the rich will receive a disproportionate share of the tax-cut because they pay a disproportionate share of the income tax.

This is a weak argument in any case, since a tax-cut could be given to the working poor and middle classes regardless of the current distribution of the national tax bill. But it is especially deceptive when we are talking about cutting stock dividend and capital gains taxes. Since the dividend tax-cut will not apply to Americans who hold stock in retirement accounts, both of these tax cuts go overwhelmingly to rich people. That is the main reason, for example, the four-tenths of 1 percent of taxpayers who make more than $500,000 a year will get 19 percent to 23 percent of the tax cut.

Making Internet purchases exempt from sales taxes is also wrong for reasons other than fairness. As any economist can testify, it is generally inefficient for the tax code to favor one type of business over another, unless there is a justifiable policy reason for doing so. Why should Internet businesses be exempt from taxes that brick-and-mortar stores have to pay on their sales?

Some people even prefer to have stores in the neighborhood that sell books and CDs and other products and may contribute to the community in other ways. If these businesses cannot compete with the Internet, so be it — buy why should government deliberately tilt the tax code against them? And why should government subsidize Internet commerce that carries a higher environmental cost due to vastly increased packaging and shipping?

During the ’90s boom, many highly paid experts let their imaginations take flight along with soaring stock prices, which were led by dot-com ventures. They dreamed that America had arrived at a “new economy,” characterized by a substantial and permanent increase in productivity. Since the Internet was believed to be at the forefront of this transformation, they argued for — and won — a moratorium on states’ taxation of Internet businesses.

These illusions about the new economy have burst with the stock market bubble, and so, too, should the moratorium on Internet sales taxes.

Our state governments are currently facing their worst fiscal crisis since the Great Depression, trying to close a gap of $100 billion over the next year. There are teachers who have gone without pay, and in Oregon, parents have been selling their blood to raise money for public education. To deprive these governments of needed revenue, just to make further progress toward achieving the “Helmsley principle,” would be inexcusable.

— Mark Weisbrot is co-director of the Center for Economic and Policy Research, His e-mail address is

Revenue wouldn’t be a windfall

By Paul J. Gessing

Alexandria, Va. — State officials are desperately looking for ways to pay for spending programs they introduced during the economic bubble of the 1990s that have proven unaffordable in the current slow-growth era.

States increased taxes by $9.1 billion in 2002 alone. Besides attempting to raise every tax imaginable, most states are aggressively lobbying on behalf of the “Streamlined Sales Tax Proposal” to tax every sale made over the Internet.

The slick campaign — led in Washington by the National Governors’ Assn. and National Conference of State Legislators — might lead a casual observer to believe that allowing states to collect taxes on e-commerce is the key to solving state budget deficits.

Unfortunately for these misguided leaders, Internet sales make up only 1.5 percent of all retail sales, or less than $12 billion. Nationwide, the amount that went uncollected from online sales in 2001 was only $2 billion — a fraction of the nearly $900 billion in state and local taxes collected that year.

Even in the absence of Streamlined Sales Tax Proposal, states tax many online sales. In fact, they tax online sales made within their borders. The online divisions of Wal-Mart, Target and several other major brick-and-mortar retailers have voluntarily decided to collect taxes on sales via their Web sites. Of course, it goes without mentioning that online retailers pay a myriad of other taxes to the states each day — including major levies on property, payroll and income.

The major impediment to the Streamlined Sales Tax Proposal is a 1992 Supreme Court decision that a state can only require sellers with a physical presence in the same state as the consumer to collect “use taxes.”

Although consumers who buy items over the Internet — or from catalogs or 800 numbers — are supposed to remit use taxes to their home states, the high court decided that states could not force companies to collect and remit taxes on behalf of the 7,500 different jurisdictions authorized by the states to collect sales taxes.

Frequently, use taxes do, in fact, go uncollected.

The idea behind Streamlined Sales Tax Proposal is for the states to create a sales tax collection cartel — with the U.S. Congress’ blessing — to coordinate taxing policies and definitions among themselves in an effort to “simplify” tax collection for businesses.

In exchange for simplification, companies, regardless of their location, would be forced to collect sales taxes. State and local officials, in essence, are using the very compliance and complexity costs they created to justify increasing their own taxing power.

These same officials fail to mention that they already possess the authority to simplify taxes right now, merely by limiting tax rates and remittances within their own states. Such efficiency gains would actually help states capture additional tax revenue by reducing compliance costs, increasing efficiency and raising corporate profit margins.

Instead of taking responsibility for reducing complexity in their own sales tax structures, most state officials consistently ignore the fact that their plan undermines the very principles of federalism and interstate competition upon which America was founded.

Simply put, the Streamlined Sales Tax Proposal battle is not being fought over the 1.5 percent of online retail sales. Rather, the ultimate objective is to increase sales tax rates and their reach through interstate collusion, thus putting a padlock on the “laboratory of the states.”

Instead of trying to pull a fast one on the Constitution and the American public, the states should work within the system to improve their economic and fiscal situations. Congress, like a good parent, must know when to say “no.”

— Paul J. Gessing is director of government affairs for the National Taxpayers Union,