Analysis: Internet Sales Tax Burdens Businesses and Consumers

Published October 24, 2011

State governments are looking high and low for more ways to take your money. One way that pops up every few years is a tax on Internet retail sales. State lawmakers are trying to justify this tax grab by pointing to the need for more tax revenue to pay off budget deficits and the notion that hard-pressed Main Street businesses can’t escape the sales tax so taxing Internet sales would level the playing field. However, state governments have a spending problem, not a revenue problem.

An Internet sales tax won’t help reduce a state’s budget deficit, and if governments really cared about Main Street retailers they would reduce their tax burden instead of adding a tax on innovation.

Every state has a different, and sometimes complex, sales tax regime, noted the U.S. Supreme Court in its 1992 Quill Corporation v. North Dakota decision, so Internet and catalog retailers shouldn’t have to collect state sales taxes unless they have a physical presence in the buyer’s state.

But politicians just don’t like to see economic cooperation between consenting individuals go unpunished, so Sen. Richard Durbin (D-IL) sponsored the Main Street Fairness Act in August 2011, which would allow states that agree to simplify their sales tax regimes to collect sales taxes from out-of-state retailers.

Taxes Don’t Reduce Deficits
When looked at closely, the justifications for the Main Street Fairness Act don’t stand up to scrutiny. State governments will not reduce their budget deficits by stripping yet more money out of the pockets of hardworking people who want the convenience of buying over the Internet.

According to a 2009 University of Tennessee study, the 1992 Supreme Court ruling left $7.7 billion of unpaid sales taxes in the pockets of Internet buyers and out of the hands of politicians in 2008. Meanwhile, according to the Center on Budget and Policy Priorities, the total state deficit forecast for 2012 is $103 billion in 42 states. Assuming the level of Internet sales remained the same after the tax is added to the price of a product, an additional $7.7 billion per year would do little to chip away at the state’s budget deficits.

In fact, if we take a look at what’s happening in Illinois, home of Durbin, the act’s sponsor, we see the real cause of the budget deficit. After admirably cutting spending from $50.3 billion in 2004 to $40.7 billion in 2005, state spending ballooned to $47.4 billion 2010. This saddled Illinois with a staggering $6.3 billion deficit that year. Higher taxes won’t fix Illinois’ budget deficit because state legislators have a spending problem, not a revenue problem.

No Benefits for Main Street
The tax grab is only one justification behind the act. The other involves a backwards attempt to help Main Street businesses by raising costs to Internet retailers.

Forcing Internet retailers to be state tax collectors, like retailers on Main Street, just means even more businesses are hit with higher costs. For example, in the Canadian province of British Columbia, the provincial government paid retailers a commission of $200 per month to collect the provincial sales tax on the government’s behalf in a token recognition that forcing businesses to act as tax collectors costs money.

Tax compliance is even more costly. A 2006 PriceWaterhouseCoopers report showed compliance costs small retailers about 17 cents for every dollar of sales.

Costs Passed on to Consumers
Instead of adding costs to Internet retailers, a forward approach would be to lower costs to Main Street retailers by cutting their taxes.

As noted, burdening Internet retailers with an additional tax is unlikely to do much about the budget deficits of spendthrift states. What it will do however, is burden innovative sellers with additional costs that will be passed on to consumers.

Instead of expanding the dead hand of government into Internet retail sales, states should make the system less costly and burdensome for Main Street, and leave money in the pockets of the people who can spend it the wisest—the people who earned it.

Maureen Bader ([email protected]) is a columnist for the Wyoming Liberty Group.