The online taxation debate

Jan. 1, 2020
When I wrote my last column on the Internet tax issue, I said that I doubted that it would be the last time I had to address the issue. Turns out that was spot on.

When I wrote my last column on the Internet tax issue, I said that I doubted that it would be the last time I had to address the issue. Turns out that was spot on.

Last month, I related the case some of my distributor friends make about the unfair advantage that Internet retailers have by not having to charge sales tax in most states. I empathized with their argument that this created an unlevel playing field for brick and mortar operators, but my empathy stopped at their proposed “fix” to the problem. They endorse passage of local laws to start collecting sales tax on Internet sales — or a national tax on all Internet sales. I argued that their support for this tax was really intended to punish competitors who enjoy a tax advantage by the simple luck of the draw. Sending more of the free market’s money to state capitols or to Washington, D.C. is no kind of fix.

As you might imagine, they disagree. So in fairness to my friends, let me share their case and let you decide.

The core of their argument is that there is no exclusion from paying sales tax on an Internet purchase. They point out that the laws in 45 states actually require payment of sales tax on Internet purchases, but shift the onus for collecting the tax from the seller to the buyer. The tax is still due, it is just that the sellers are not required to collect it as are brick and mortar retailers. It turns out that each of us who makes an Internet purchase is required to report that purchase and pay any applicable taxes to our respective state.

They go on to argue that most states are at a point of near financial collapse. The revenues that are rightfully owed on Internet transactions could be flowing into struggling state coffers. A 2009 University of Tennessee study estimated that uncollected sales taxes on e-commerce cost states $7.7 billion in 2008.

The third leg of their case is that the situation puts the backbone of local economies at a competitive disadvantage. Sales tax rates vary from 0 percent in five states to as high as almost 9 percent in others. This, they say, puts local small businesses at risk to fail. We all know about the critical role these small concerns play in local economies. They create jobs partially by collecting the very taxes Internet companies avoid.

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OK, having heard their case and ruminating on it, here are my thoughts.

To the argument that I “should rightfully be reporting the purchase and paying the tax voluntarily,” I politely and respectfully laugh out loud. To me, this is like those foolish and antiquated laws that are still on the books, like it’s illegal to kiss any member of the other sex in public unless they are your spouse or laws that forbid pigs from wearing dresses at county fairs in Wyoming. Such laws are meant to be ignored.

To their second point that most states could use the uncollected revenue to balance their budgets, I politely suggest another alternative. Tell the leaders of those states that are upside down in their budgeting that they need to spend less money. As a fiscal conservative, I can’t get my head in a place that collecting more tax is the right way to balance a budget.

The third point is the tough one. Make no mistake: These small businesses are, in fact, the backbones of local economies. They not only pay taxes and create jobs, but they sponsor little league teams, civic organizations and charities. I still can’t get behind the idea of collecting more taxes as the answer. However, whether I (or you) agree or disagree is probably becoming a moot point very quickly.

In researching the facts, I learned that the current Internet tax exclusion was established by a 1992 Supreme Court decision, which was predicated on the premise that collection of sales tax on mail-order or Internet purchases was far too complicated to require those sellers to do so. Since then, software technology has moved that impossible feat to extremely doable. Additionally, as of July 2010, 44 states and the District of Columbia had approved an interstate agreement that creates uniform sales tax rules and definitions, which 24 states have now adopted. Also the National Governors Association has established the Streamlined Sales Tax Project, a multi-state effort to simplify and align sales tax policies. In other words, it would appear that this debate is over. The taxman wins again.

When I wrote my last column on the Internet tax issue, I said that I doubted that it would be the last time I had to address the issue. Turns out that was spot on.

Last month, I related the case some of my distributor friends make about the unfair advantage that Internet retailers have by not having to charge sales tax in most states. I empathized with their argument that this created an unlevel playing field for brick and mortar operators, but my empathy stopped at their proposed “fix” to the problem. They endorse passage of local laws to start collecting sales tax on Internet sales — or a national tax on all Internet sales. I argued that their support for this tax was really intended to punish competitors who enjoy a tax advantage by the simple luck of the draw. Sending more of the free market’s money to state capitols or to Washington, D.C. is no kind of fix.

As you might imagine, they disagree. So in fairness to my friends, let me share their case and let you decide.

The core of their argument is that there is no exclusion from paying sales tax on an Internet purchase. They point out that the laws in 45 states actually require payment of sales tax on Internet purchases, but shift the onus for collecting the tax from the seller to the buyer. The tax is still due, it is just that the sellers are not required to collect it as are brick and mortar retailers. It turns out that each of us who makes an Internet purchase is required to report that purchase and pay any applicable taxes to our respective state.

They go on to argue that most states are at a point of near financial collapse. The revenues that are rightfully owed on Internet transactions could be flowing into struggling state coffers. A 2009 University of Tennessee study estimated that uncollected sales taxes on e-commerce cost states $7.7 billion in 2008.

The third leg of their case is that the situation puts the backbone of local economies at a competitive disadvantage. Sales tax rates vary from 0 percent in five states to as high as almost 9 percent in others. This, they say, puts local small businesses at risk to fail. We all know about the critical role these small concerns play in local economies. They create jobs partially by collecting the very taxes Internet companies avoid.

PAGE 2

OK, having heard their case and ruminating on it, here are my thoughts.

To the argument that I “should rightfully be reporting the purchase and paying the tax voluntarily,” I politely and respectfully laugh out loud. To me, this is like those foolish and antiquated laws that are still on the books, like it’s illegal to kiss any member of the other sex in public unless they are your spouse or laws that forbid pigs from wearing dresses at county fairs in Wyoming. Such laws are meant to be ignored.

To their second point that most states could use the uncollected revenue to balance their budgets, I politely suggest another alternative. Tell the leaders of those states that are upside down in their budgeting that they need to spend less money. As a fiscal conservative, I can’t get my head in a place that collecting more tax is the right way to balance a budget.

The third point is the tough one. Make no mistake: These small businesses are, in fact, the backbones of local economies. They not only pay taxes and create jobs, but they sponsor little league teams, civic organizations and charities. I still can’t get behind the idea of collecting more taxes as the answer. However, whether I (or you) agree or disagree is probably becoming a moot point very quickly.

In researching the facts, I learned that the current Internet tax exclusion was established by a 1992 Supreme Court decision, which was predicated on the premise that collection of sales tax on mail-order or Internet purchases was far too complicated to require those sellers to do so. Since then, software technology has moved that impossible feat to extremely doable. Additionally, as of July 2010, 44 states and the District of Columbia had approved an interstate agreement that creates uniform sales tax rules and definitions, which 24 states have now adopted. Also the National Governors Association has established the Streamlined Sales Tax Project, a multi-state effort to simplify and align sales tax policies. In other words, it would appear that this debate is over. The taxman wins again.