Chances are you purchased at least one gift over the Internet this Christmas season. The online shopping mall and research service Bizrate.com reported that shoppers spent $225.5 million on Internet purchases in just one day in early December, purchases that are free of sales taxes. Thanks to the grinches at the National Governors Association (NGA), however, this could be the last holiday season to enjoy such opportunities.
Contrary to popular belief, the Internet is not a tax-free zone. The Internet Tax Freedom Act of 1998 banned “special and discriminatory taxes” that states might dream up specifically for the Internet, but it’s a 1992 Supreme Court decision, Quill Corp vs. Heitkamp that governs sales taxes for catalogue and Internet purchases. Quill prevents states from collecting sales taxes from companies that have no physical presence within their geographical borders. And it is these limitations that the NGA seeks to overturn. If successful, the NGA Internet tax grab will not only mean an end to the occasional tax-free Internet purchase, but it will also violate the time-honored principle of “no taxation without representation.”
As things stand now, if a resident of New York purchases a Christmas gift from an online toy store in California and that retailer has no physical presence in the Empire State, New York cannot force the toy store to remit a sales tax (although, it should be noted, the New Yorker is legally obligated to remit a “use tax” to his home state). All fifty states have use tax laws on the books, but because of political unpopularity they are seldom enforced.
The same shopping scenario under the NGA’s tax regime: New York would be able to collect tax from the California-based toy seller. Never mind that the company being taxed has absolutely no voice in what items New York decides to tax or at what rate it taxes them, and does not benefit from any services that state provides to its residents. Taxing officials would have no accountability to such extra-territorial taxpayers and no incentive to keep tax rates at bay. Consequently, the NGA approach would mean higher taxes and more transactions taxed; bad news for businesses and consumers alike.
In the “bricks and mortar” world, retailers collect and remit sales taxes and they base those rates on their own location (wisely avoiding the burden of computing different rates for any one of the thousands of tax jurisdictions their walk-in customers could be from). But since the NGA wants to empower every state to collect sales taxes from any online company based not on that business’s location but on a resident shopping there, the location of each customer must be collected and verified. Even leaving aside the implications that would have for consumer privacy, it would be no easy technological feat with 7,500 unique taxing jurisdictions in the US.
In trying to justify their tax-grab, the NGA claims that as sales grow, tax revenue will become insufficient to fund critical state and local services. Currently, tax coffers are awash with funds, but because e-commerce is predicted to reach $108 billion by 2003 it is possible that states will take in substantially less from sales taxes. Contrary to the ideas of the NGA, the answer to tax revenue concerns is not to extend states’ taxing and regulatory regimes beyond their geographical borders. Currently, five states have no sales tax at all and there are no related accounts of closing schools or bankrupt firehouses.
States and localities have options; one is an origin-based sales tax model. Purchases would be taxed according to the seller’s primary point of business, regardless of the location of the buyer. This approach promotes tax accountability and tax competition among jurisdictions. The NGA’s tax cartel would do neither.
As technology changes the way Americans live, work, and shop, states will need to adjust their mode of operation and governors will need to give careful consideration to how government can properly raise revenue in the new economy. But if the principle of “no taxation without representation” is to be preserved, then states shouldn’t have the opportunity to tax those to whom they are not accountable. Besides, Christmas shopping is painful enough as it is.
Copyright © 2000 Bridge News Service