Internet taxes will drive up all taxes

Published November 26, 2012

Barely two months ago, the world’s largest online retailer, and other online retailers began collecting sales taxes in California, even though they have no warehouses or other buildings in the state.
It’s a victory for tax-hungry state and local government officials and for local retailers who have long complained of the supposed advantage online retailers have because they have not had to collect sales tax except where they have had a physical presence. But it could be a Pyrrhic victory.
As part of the tax deal, Amazon has pledged to open warehouses in California. City officials in San Bernardino and Patterson (Stanislaus County) have committed to handing most of the money Amazon collects back to the company in exchange for building warehouses in their cities.
Local warehouses could make possible same-day shipping to many California customers. And Amazon spokesman Scott Stanzel told the Los Angeles Times the company will continue to charge lower prices than traditional California retailers.
Fast shipping, low prices and warehouses built partly with tax money instead of Amazon’s own money. Oh, yeah, California’s traditional retailers will do fine with a taxpayer-funded Amazon in their back yard.
Traditional retailers say it is only fair that Amazon and other online retailers collect sales tax, so let’s talk fairness.
By requiring online retailers with no physical presence in the state to collect sales tax, California is requiring businesses to comply with governments that give those businesses no political voice and no benefits or services. It is taxation without representation.
Now, though, states across the country are acting like California, looking for ever-more ways to tax. Favorite tax targets are always people who live elsewhere. And there is a push for the federal government to require online retailers to collect state and local sales taxes regardless of where the retailer is located.
Even with today’s computer technology, it’s difficult for online merchants to accurately charge sales taxes. There are approximately 9,600 different taxing jurisdictions in this country, each with its own tax rates. The problem is not just different sales tax rates. There are also differences in what is taxed. Some things – certain foods, for instance – are taxed in some jurisdictions and not in others, or they have tax rates that are different from the standard retail sales taxes.
Sales tax rates also keep changing. Just this month, for instance, commissioners in Cook County, Ill. – the nation’s second-largest county by population – approved their 2013 budget. That budget includes a 0.25 percent decline in the county’s sales tax rate, which was raised a full percentage point in 2006.
States and local jurisdictions often change their sales tax rates, including for temporary “sales tax holidays,” many of which last only a few days or weeks. How are retailers thousands of miles away supposed to keep up with such changes?
Under law, a state government cannot force a tax on a company unless the company has a physical presence, or nexus, in the state. The U.S. Supreme Court in Quill Corp. vs. North Dakota ruled a state must prove a company has a “substantial nexus” before taxes may be imposed. Since this ruling 20 years ago, the physical presence standard has been an important taxpayer protection.
Competition from online shopping has enabled local retailers to argue truthfully high sales tax rates may hurt them and drive customers away. If online retailers are required to collect sales taxes from all around the country, there will be less incentive for state and local officials to hold down their sales tax rates.
Matthew Glans is senior policy analyst, and Steve Stanek is a research fellow at the Heartland Institute.