Policy Documents

Research & Commentary: Internet Sales Taxes

James G. Lakely –

State legislators are desperate for new tax revenue to plug massive deficits without cutting spending. And a confident Democratic Washington, DC now has the power to enact virtually any tax policy it wishes—with aims to impose sales taxes on every online purchase. In the process, politicians could demolish one of the last remaining redoubts of vibrant economic enterprise in the United States.

The commerce clause of the U.S. Constitution, as interpreted by the Supreme Court in the 1992 Quill v. North Dakota decision, prevents a state from compelling a company to collect sales taxes unless it has a physical presence in the state. In that ruling, however, the court noted Congress, which has the authority to regulate interstate commerce, is free to determine “the extent the states may burden interstate mail order (and online) concerns with a duty to collect use taxes.” That day is imminent.

Sen. Mike Enzi (R-WY) and Rep. William Delahunt (D-MA) are expected to sponsor a bill to allow states to force out-of-state Internet sellers to collect their sales taxes. Such a bill would buffet the U.S. economy at the worst possible time.

The economy contracted by more than 6 percent in the past two quarters. The last thing we need right now are policies that will further suppress commerce. Internet sales taxes also present a compliance nightmare for every online firm, from small mom-and-pop retailers to Amazon and Overstock. There are about 7,400 tax districts across the United States, which makes 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 this idea say part of the deal will be a simplification of sales taxes from state to state. The public can be forgiven for looking at the history of tax “simplification” in America and seeing it as a scheme to force all states’ tax rates up by reducing competition among the states.

One can empathize with state legislatures dealing with budgets bleeding pools of red ink. The solution, however, is not to impose new taxes on Americans, but to reduce government to handle only its core 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.

Storm of Taxation Threatens to Swamp Internet
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/16/INH117IO04.DTL
James G. Lakely, a research fellow at The Heartland Institute, warns in The San Francisco Chronicle that 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 post at Lawyers.com lays out the basics and history of attempts to collect sales taxes on Internet sales in the United States.

States Angle for Ways to Tax Internet Sales
http://www.heartland.org/policybot/results/24872/
An 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.

Internet Taxation
http://www.netcaucus.org/events/2003/tax/onepagers/ccia-tax2003.pdf
The Computer & 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 jurisdictional taxes.

The Internet Tax Solution: Tax Competition, Not Tax Collusion
http://www.cato.org/pubs/pas/pa494.pdf
Adam D. Thierer and Veronique de Rugy explain why Congress should resist calls to allow states to collect taxes on the sale of goods over the Internet.

New York Gov. Paterson Proposes ‘iTunes Tax’
http://www.heartland.org/policybot/results/24573/
An article in InfoTech & Telecom News outlines New York’s drive to impose more taxes on Internet commerce, and how doing so would run counter to economic recovery in the state.

E-tail vs. Retail? Five Reasons to Ax Florida’s Proposed Internet Tax
http://www.jamesmadison.org/pdf/materials/329.pdf
Christie Raniszewski gives five reasons why Florida should not join the Streamlined Sales Tax Project, an organization of states that is urging Congress to allow states to impose sales taxes on Internet purchases.

Why Congress Should Counter Efforts to Tax Internet Commerce
http://www.heritage.org/Research/InternetandTechnology/EM628.cfm
The Heritage Foundation urges Congress to not impose any new taxes on the Internet, explaining how a relatively tax-free Internet has been a net boon to the states and federal coffers.

States’ Internet Tax Scheme Could Lead to a National Sales Tax
http://www.freedomworks.org/publications/states%E2%80%99-internet-tax-scheme-could-lead-to-a-nation
FreedomWorks describes the Streamlined Sales Tax Project and how it offends the notion of “no taxation without representation.”

For further information on the subject, visit the Telecom Issue Suite on The Heartland Institute’s Web site at 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 Heartland Research Fellow Jim Lakely, managing editor of InfoTech & Telecom News, at 312/377-4000 or jlakely@heartland.org.