Policy Documents

Research & Commentary: Internet Sales Taxes

James G. Lakely –
November 10, 2009

Alabama Revenue Commissioner Tim Russell recently called for requiring online retailers to collect sales taxes on goods purchased by the state's residents, an idea gaining traction in states across the country.

It's a bad idea that will hurt business in the state and won't raise the expected revenue.

Current Alabama law already requires state residents to pay sales tax on what they purchase from out- of-state bricks-and-mortar stores, the so-called "use tax." The Transaction Tax Standards Association reports about two-thirds of Alabamans remit the use tax as required.

The new tax-remittance burden, however, would fall on online retailers. It would add to their costs and could demolish one of the last remaining redoubts of vibrant economic enterprise--the last thing any state needs during a deep recession.

Moreover, the taxes are unlikely to generate the desired revenues, because these laws force Internet businesses to cut ties with the states that adopt them. After New York State imposed an "Amazon Tax" earlier this year, Amazon cut loose all its affiliates there. The state no longer gets tax revenue from New York affiliates because they can't direct sales to Amazon.com.

Internet sales taxes present a compliance nightmare. There are about 7,400 tax districts across the United States, making it absurdly difficult to ascertain which state gets what cut of tax revenue for sales that take place in several places and, in a sense, no place. Supporters of the so-called Streamlined Sales Tax Project (which 20 states have joined so far), who urge Congress to allow Internet sales taxes, say it will simplify sales taxes from state to state. The public can be forgiven for seeing this as a scheme to force all states' tax rates up by reducing competition among them.

Imposing sales taxes on Internet purchases is also probably unconstitutional, as indicated by the Supreme Court's 1992 Quill v. North Dakota decision, which prevents a state from compelling a company to collect sales taxes unless the firm has a physical presence in the state.

State legislatures dealing with budgets bleeding pools of red ink should not impose additionally burdensome new taxes, but should instead reduce government to its necessary functions. The public can easily afford that without new taxes.

The following articles offer additional information on Internet sales tax hikes and their effect on e-commerce.

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Transaction Tax Standards Association, data on use tax compliance:
http://www.t2sa.org/wiki/revenue_losses_from_ecommerce/methodology/tax_losses

Storm of Taxation Threatens to Swamp Internet
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/16/INH117IO04.DTL
Writing in the San Francisco Chronicle, James G. Lakely, co-director of the Center on the Digital Economy at The Heartland Institute, warns Congress will choke the economic vitality of the Internet if it allows states to impose sales taxes on online purchases.

Online Sales Taxes
http://internet-law.lawyers.com/e-commerce/Online-Sales-Taxes.html
This item at Lawyers.com lays out the basics and history of attempts to collect sales taxes on Internet sales in the United States.

The Taxman Clicketh
http://www.heritage.org/Press/Commentary/ed121803a.cfm
Heritage Foundation President Edwin J. Feulner explains how taxes on the Internet stifle innovation and economic growth.

'Amazon Taxes' Fad Harmful to States, Consumers, Business
http://www.heartland.org/policybot/results/26105/
Ryan Young, a fellow in regulatory studies at the Competitive Enterprise Institute, explores the constitutional and economic problems regarding imposition of online sales taxes.

Five Reasons Why the 'iTunes' Tax Is a Bad Idea

http://www.heartland.org/policybot/results/24535/
James G. Lakely gives five reasons why imposition of a sales tax on Internet purchases will cause more harm than good, in an op-ed published in The New York Post.

Internet Taxation
http://www.netcaucus.org/events/2003/tax/onepagers/ccia-tax2003.pdf
The Computer and Communications Industry Association explains the problems associated with an Internet tax, including pricing considerations to the consumer and administrative headaches associated with complying with myriad state, county, city, and other jurisdictions' taxes.

The Internet Tax Solution: Tax Competition, Not Tax Collusion

http://www.cato.org/pubs/pas/pa494.pdf
Cato Institute's Adam D. Thierer and Veronique de Rugy explain why Congress should resist calls to allow states to require online retailers to collect taxes on the sale of goods over the Internet.

Online Retailers Drop More Affiliates Over Internet Taxes

http://www.heartland.org/policybot/results/25724/
This story from the September 2009 issue of Budget & Tax News reports on how online retailers Amazon.com and Overstock.com recently dropped hundreds of affiliate advertisers in California, Hawaii, North Carolina, and Rhode Island because of new laws requiring Internet retailers to collect state sales taxes if they have local affiliate advertisers.

States Angle for Ways to Tax Internet Sales
http://www.heartland.org/policybot/results/24872/
This article in InfoTech & Telecom News addresses constitutional questions surrounding the imposition of sales taxes on the Internet and the harm such taxes would do to e-commerce.

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For further information on this subject, visit IT & Telecom News at http://www.infotech-news.org or the InfoTech Issue Suite on The Heartland Institute's Web site at http://www.heartland.org.

Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, you may contact James G. Lakely, co-director of the Center on the Digital Economy at The Heartland Institute and managing editor of InfoTech & Telecom News, at 626/421-9414 or jlakely@heartland.org.