9,646 Tax Burdens on the Internet



John Donahoe, CEO of eBay, sent a blast email to Americans who use the online buying service urging them to tell "Congress 'No!' to new sales taxes and burdens for small businesses." The bill would put at risk the Internet's status as the vibrant home of low regulation and low taxation.

Sen. Mike Enzi speaking in Washington, D.C., at an April 23 news conference about an Internet sales tax bill. Sen. Lamar Alexander is at far left.

It would force online retailers with $1 million or more in annual sales to collect and remit state and local taxes, subject to audit by any taxing state where any online shopper lives. Because sales taxes vary by locality as well as state, no one knows for sure how may different rates and rules there are. The Tax Foundation estimates there are 9,646 different sales-tax jurisdictions in the U.S., each one of which can have dozens or hundreds of different tax rules.

Proponents of the bill, which they call the Marketplace Fairness Act, say they're just leveling the playing field between bricks-and-mortar stores and online stores. It's true that many online stores benefit from not charging sales tax, but they also don't use the services of states where they have little or no presence. Online stores would have to do something physical stores have never done for most sales: assess taxes based on where their customer lives. Physical stores apply their own local tax to most purchases.

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It's not just rates that vary but rules that determine what's taxable and what isn't. Wisconsin has a 1,400-word regulation on when the sale of an ice-cream cake is taxable. If the ratio of ice-cream layers to cake layers is too high, sales tax has to be collected. Candy bars are taxable in New York, but not in New Jersey. In Texas, large pretzels are tax-exempt baked goods, but small pretzels are taxable snacks. Iowa charges a sales tax on decorative pumpkins but not edible ones.

Rhode Island taxes soft drinks but not bottled water. It taxes clothing accessories but not fur clothing. It taxes kidney-dialysis machines with or without a prescription, unless used at home, whereas prosthetic devices, eyeglasses and contact lenses are taxable without a prescription but tax-free with one.

When a similar bill to collect online sales tax was proposed in 2005, proponents assured skeptics that the law would only come into effect after states streamlined and standardized their tax systems. A Streamlined Sales Tax Governing Board had been set up in 2000 for this purpose, but sales-tax rules remain byzantine. Software can help apply frequently changing rules from thousands of jurisdictions, but the responsibility remains with retailers.

We take the largely free and untaxed Internet for granted, but often forget it was the rare act of politicians voting to keep their hands off that made today's Internet possible. The Internet Tax Freedom Act of 1998 stopped the federal government, states and cities from taxing Internet services directly. Congress has always had the power to force collection of sales tax online but until now was reluctant to get in the way of the smooth operations of the Internet.

Where politicians stand on this issue seems to depend on where they live. Many states are desperate for new revenue and anxious to avoid raising other taxes. That accounts for why many Republican senators, at the lobbying of their governors, support the bill, whereas Democratic senators from New Hampshire, Montana and Oregon, which don't have sales taxes and thus stand to gain no revenues from burdening interstate commerce, oppose it.

A special-interest approach also applies to big businesses. The large brick-and-mortar stores have long led the charge for the new online taxes. Now large online retailers, which had fought these taxes for years, have joined them, figuring they can afford to comply with complex tax rules that will swamp smaller online competitors.

This is especially ironic in the case of Amazon, which supports the new taxes after years of litigation and lobbying against similar tax proposals. Amazon now has a physical presence in many states, such as warehouses for same-day shipping, so it must collect taxes anyway.

As more online retailers add local services, they'll become subject to local sales taxes. In the meantime, the country is better off letting online retailers focus on building their products and services, not on forcing them to become tax experts on thousands of tax rules among states, counties and cities.


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