The Internet Tax: Another Government Assault On Prosperity

NRD Editor’s Note: This column was originally published in the Las Vegas Review Journal on August 19, 2012.

Our National DebtBy Howard Rich — Across America politicians of both parties will tell you the number one issue facing our country is job creation. They’re right — yet what they continually refuse to acknowledge is that creating these jobs is not their responsibility.

Government’s role in economic development should always be passive — confining expenditures to core functions while keeping taxes low in an effort to allow the optimum conditions for private sector growth.

“Get out of the way,” in other words.

Unfortunately our elected officials continue standing in the way of prosperity — as evidenced by the looming battle over internet taxation.  The U.S. Congress is currently contemplating legislation that would dramatically expand the ability of state and municipal governments to tax internet purchases across territorial lines.  In addition to being of dubious constitutionality (i.e. taxation without representation) this legislation would strike at the heart of the private sector in an effort to help state and local governments subsidize our nation’s growing dependence economy.

It’s a road this country has been down before.

“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it,” former president Ronald Reagan once famously remarked.

That’s exactly what’s happening with internet commerce.  While the broader U.S. economy continues to groan under the weight of President Barack Obama’s failed Keynesian interventionism, internet commerce is one of the few segments of the private sector that’s “moving” – which makes it an inviting target for these state and local bureaucracies.

According to data provided by the U.S. Census Bureau, online sales in America grew from $27.6 billion in 2000 (roughly 1 percent of all retail purchases) to $166.5 billion in 2010 (4.28 percent of all retail purchases).  And while total spending cooled during the recent recession, e-Commerce has expanded by double digit percentages on a year-to-year basis over the last seven consecutive quarters.

In fact based on data from industry analyst comScore, the rate of online spending growth during the second quarter of 2012 was four times as fast as the growth in overall consumer spending — with double-digit growth rates projected for the next four years.

Statistics like these make bureaucrats’ mouths water — which is why they are pushing Congress to grant them this expanded taxing power.  Under the so-called “Marketplace Fairness Act,” states and municipalities would be permitted to impose internet sales tax extraterritorially – forcing residents who live outside their borders to pay their local sales tax rates.  Meanwhile retailers that do more than $500,000 a year in gross receipts would be forced to calculate, collect and remit sales tax on all remote transactions — keeping track of 9,646 different sales tax jurisdictions.

Does that sound fair?  Of course not.  In fact this legislation would be a death knell for many of the small businesses that politicians claim to be fighting for — not to mention a harbinger of higher consumer prices as these businesses go by the wayside.

“Many of the smallest mom-and-pop operators would struggle to comply,” writes researcher Adam Thierer of the Mercatus Center at George Mason University. “Greater industry consolidation and less competition and consumer choice could be the unfortunate result.”

And for what – so that state and local governments can continue a spending orgy that barely blinked during the recent recession?

“Politicians want this bill passed to raise new tax revenue for broken state governments facing budget shortfalls,” U.S. Sen. Jim DeMint explained recently.  “But legislators in state capitals don’t want to make the hard decisions to cut spending or raise taxes on their constituents — they fear the voter backlash. So they’d like their allies in Washington to make it legal for them to tax people who can’t vote against them.”

How big a dent in the economy are we talking about?  According to Forrester Research, the average American shopper spends around $1,700 annually online — which means they would pay an additional $125 annually.  Add it all up and we’re looking at a $23 billion tax hike — and that’s before we start assessing compliance costs and the damage done by thousands of lost jobs.

Is the American economy really in any condition to sustain such a blow?  No.  Tax hikes like this are part of the recipe for recessions, not recoveries.

Internet commerce will follow one of two paths moving forward: It will either continue to grow, driving a rebirth of American consumerism — or it will become yet another vibrant marketplace dragged down by the tentacles of big government.

If our elected officials are serious about “creating jobs,” then this choice is a no-brainer — and best of all it requires them to do absolutely nothing.

The author is chairman of Americans for Limited Government.

  • FedTax

    Mr. Rich’s statement: “Under the so-called Marketplace Fairness Act, states and municipalities would be permitted to impose Internet sales tax extraterritorially – forcing residents who live outside their borders to pay their local sales tax rates.” could not be more wrong. The only one suggesting such a scheme (getting residents of one state to pay the sales tax of another state) is Mr. Thierer.

    The truth is that the MFA (see http://marketplacefairness.org) would allow states to require to remote retailers to collect and remit (not pay) existing sales tax due on purchases made by their residents, exactly the way local retailers are required to. Any suggested complexity, burden, or cost to keep track of all the various jurisdictions have been largely eliminated by free sales tax processing services available over the internet.

  • dumber-than-dirt

    I fail to understand why this is an issue. This is hardly a proposal for a new tax.
    States collect tax from our neighbors with brick and mortar storefronts – our neighbors must expend the monies and energies to collect and process these taxes – and we all benefit from this form of taxation. SO, why shouldn’t companies operating from the basements of their homes be made to comply as well.
    Internet businesses need to comply with existing laws that regulate and tax businesses.
    I am absolutely against new and increased taxation – but I am also strongly opposed to internet buisnesses being allowed to play by a set of skewed rules.
    Play fair – you are putting your neighbors out of work.

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  • sooner4ever

    Article 1, Section 9 of the constitution says “No tax or duty shall be laid on Articles exported from any state.” I think that’s pretty clear. If you buy it from another state, then you shouldn’t have to pay any taxes.

  • waycal

    Dumber you are not a business owner for sure cause I dont want to try and account for more taxes to be paid the the government in different states and I am a small business owner. You have the attitude oh ya lets tax some more . Go start a business then you can make a statement, until then keep quiet!

  • Iron Angel

    We already pay in excess of a total of 50% tax if you add everything up, state, federal and local. Regardless of I think or he thinks or she thinks or some liberal blaugh blaugh; Business are already regulated to death and taxed to death, it’s a wonder they can manage to stay in business. For that matter 80% fail the first year. I’m sick of being taxed every time I turn around or every time government thinks they can screw the public again. The government can cut taxes and stop wasting our money and they do waste our money! On lavish vacations (ie Mrs Obama’s staff and her outlandish vacations a good start) and bridges that go nowhere, the list is too long… ! More taxation is pure B.S. no matter where it comes from…!!!!!

  • Repub7

    Amazon already charges sales tax when I buy books for my Kindle.

  • jondarmes

    We as a nation are always better when congress does nothing. Gridlock is our best friend.

  • James Maxwell

    While I hate taxes period, they are a necessary evil that we must endure to a certain
    extend. The government levies taxes to pay for the military and pay or the services
    required to govern our nation. We have seen much greed thru taxation by the
    Federal government, State Government and local governmental agencies. They have abused and misused this taxation for their own political gain and enrichment at the expense of the citizens. And while at first I disliked the taxation of purchases over the Internet I must admit that I have changed my mind to a large extent. If I purchase something overseas via the Internet it will be hit with custom charges as soon as it enters the United States. By the same token if a company has a “footprint” in a state then they must charge a state and local sales tax and send them to that state or local municipality. Why should some be exempt when it deprives the local state or municipalities of needed revenue? This only puts a further burden upon those stores who operate in the local area and pay their fair share of taxation. And this also gives the local tax payers some relief. To me this is not what I like but it is a fair solution to the problem. And while I may be mistake don’t they have to pay a tax in their home state when they buy items and sell them?

  • butterfly lady

    I had a stroke a year ago and it is hard for me to get out and about – I do 99% of my shopping on line – Christmas/ birthday gifts/ wedding gift/ clothing for myself. Find it very easy for me to find what I want – even covers for my throw pillows! To apply taxes on me would be a real burden and finances are very tight – going to contact my congressman on this concern.

  • FedTax

    You are mistaken. Sales tax is not a duty or tarriff based upon import or export from any state. Sales taxes are consumption taxes on the consumer, who is the beneficiary of the local services funded by their sales tax.

  • Leonard L Cook

    When will our polititions learn to spend our money which it is, like their own money which it is not.
    Services are not free. It maters not wheather it comes from the government or from the privet sector. If we cant aford it don’t spend it.
    There are needs and wants in life. Make sure it is a need not just a want and fill it and let the wants wate untill there is money to cover the cost just like we do at home!!!!!!!.

  • del

    These aholes all need to be fired….tax and spend is their mantra not save and reduce! We need to oust everyone of them for they do not represent We the people. Just recently, they voted to give the impostor in charge more power in a bipartisan vote…..WHAT A DISGRACE TO WE THE PEOPLE….He should be in jail charged for fraud and treason , not obtaining even more power from the spineless pukes in congress!

  • topeka

    This is a misstatement of what is happening and what the
    LEFT wants to happen. Pardon, while I suspect the misstatement is
    intentional.

    Consider; if you go to California, and you buy a gizmo, do you pay the
    “local” sales tax or the “destination” sales tax?

    If you go to another county or city, and you buy a gizmo, do you pay the
    “local” sales tax or the “destination” sales tax?

    We all know the answer. There are a few jurisdictions playing with the
    idea of “destination” sales taxes based on the “residence”
    address of the consumer, never mind protectionism or privacy, but generally we
    all pay the “point of sale” sales tax.

    Fedtax makes three mistakes:

    1. Sales tax is a tariff when the transaction crosses state lines – this is a fallacy
    of switching the meaning of the words in mid sentence. What we are
    discussing is sales taxes on transactions across state lines – hence a
    duty/tariff is exactly what Marketplace Fairness is all about.

    2. Sales taxes are often confused with consumption taxes;
    but these are transaction taxes that involve no consumption at the point of
    sale. The same thing occurs when you buy
    a gizmo in a big city, then drive home to “consume” the gizmo in the small
    town. The sales tax paid goes to the
    city/county/state at the point of sale – not the point of consumption. Marketplace Fairness is all about breaking
    this tradition – for obviously unfair intent.
    To be fair, with M.F., the big city retailer would have to collect a
    destination tax – and either rob the locale of the sales tax at point of sale
    or tax the out of towner twice.

    3. I just said it – but this is FedTax’s third mistake –
    that the tax supports the locality. No,
    first taxes support govt – which includes a lot of worthless stuff, second you
    pay property taxes which support your locality, third, many states redistribute
    wealth, right or wrong to support nonsense in all locations, and to support
    wasteful spending in the big city. But
    more to the point, if you buy a gizmo in the big city, that tax hardly supports
    the consumer: Nothing in the consumer’s
    home location, maybe a bit of police service to protect the consumer-traveler,
    and if the seller’s jurisdiction is supporting the seller, some of that benefit
    may go to the consumer. Really? Think about it – that’s why we are buying on
    the internet b/c the big cities have destroyed their retailers – except the Big
    Box stores and Nordstrom retailers.
    Everyone else has fled.

  • FedTax

    There is no misstatement, and I will explain why I disagree with each of your claims.

    1. As I said before, sales tax being due has nothing to do with the transaction crossing the state border. The Sales (or Use) tax is due under all circumstances, and has been for over 50 years in most states, however out-of-state retailers without nexus are not obligated to collect the tax due.
    2. Purchasing something when you are out of state does not alter your use tax obligation. If you paid sales tax at the time of sale when on your vacation – simply claim the deduction/credit on your use tax filing. This also is law that has been in place for a very long time (in most states), but the fact is that most people do not file use tax declarations. PROOF: California BOE estimated in 2011 that less than 4 tenths of one percent (yes 0.004%) of consumers actually file use tax returns.
    3. Sales tax supports local initiatives: this also is true, despite your apparent frustrations with your state. While some states simply direct all sales tax proceeds toward their general fund, many more states specifically direct local sales tax for particular purposes and to particular jurisdictions. In ALL cases, sales tax does not go to the federal government – it always states in your state and local government.
    If you resent or even want to repeal your state’s sales and use tax laws, that should be taken up with your state legislature.

    This debate has nothing to do with the sales and use tax due, or who pays it (which is ALWAYS the consumer, not the seller). Rather, this debate about whether states should be allowed to require remote retailers to collect sales tax, just like local retailers. And if so, what must a state seeking such authority be required to do to minimize burden on the remote retailer.

  • topeka

    Another misstatement by FedTax.

    First – a thank you for pointing out Rich’s error – re; confusing the “destination” tax vs. the “point of sale” tax. No doubt, like many Leftists, you think this mistake is intentional…. in a way it is. The proponents of this nonsense hope people will be confused, and thereby strengthen their argument as opponents are forced to correct their mistake. Nonetheless – Rich is not wrong in the sense that just as with all govt boondoggles and programs – the phony fairness of the Marketplace Fairness Act will expand to include collecting double sales taxes on internet transactions on both the point of sale and the point of destination. So just let it happen, then wait a tic.

    Second, FedTax brings up the strawman of “collecting” and “remitting” vs. “paying” the taxes. As we all know, retailers are responsible for paying all the taxes, penalties and interests on their sales based on their records – unless they are favored retailers who operate above the law. As some do. The cost of compliance and remitting is not insignificant – which is why these liars have a $500k threshold on sales to get their nose in the tent. Obviously, on smaller sales, the cost would break most of us, and it would not be cost effective for the RENT SEEKERS behind this scam to change the fundamental laws of the land.

    Now that we’ve let FedTax get in his jab, lets go on to his own misstatements.

    1. MFA’s plan is not the same as “local” retailers. Or any retailers for that matter. MFA’s plan is a “Destination Sales Tax” aka – a tariff on a cross-border transaction. The agreements reached with retailers such as Amazon dance around this – but basically, the idea is that Amazon is essentially “Local” due to their size and volume. Everything else is just the mental histrionics of the Left. What “local” retailers collect, and remit is a “point of sale” tax. True – there are jurisdictions, see above, where they are experimenting with “destination” taxes. But even those are within states – between Counties and Municipalities – not between Sovereigns. MFA’s plan throws the Interstate Commerce clause – the ACTUAL REASON FOR IT – to prevent PROTECTIONISM – under the bus.

    - example; you go to Californication to Fry’s and buy a gizmo, Fry’s then collects the tax for the “destination” such as Florida and remits said collection to Florida. Some liars say consumers are supposed to do this now – which is not true for almost all transactions. See MFA’s own website, for just a short version:

    http://marketplacefairness.org/what-is-the-marketplace-fairness-act/

    - No, if local retailers collected “destination” information – and collected tax on the same, the hue and cry might even be heard in Sacramento.

    - What internet retailers are being asked to do fits the example – ask everyone their home address, and tax them according to their residence (if they don’t lie.) and remit to that authority.

    2. Complexity and burden – eliminated? – Nonsense! This is a reference to software provided by Amazon, and other Internet Market Makers, for the collection and remittance of taxes of sales through their systems. Not the use of said software by an individual business… Nor MUCH LESS by someone trying to manage their taxes without a software package that monitors all of their business transactions. Think about this.

    - First it cannot be true. Remember mortgage securities and the banks? That was child’s play. What is happening is that the software is collecting a percentage, and the market maker is remitting to the state – which may or may not (what do you think) send that to the taxing bodies in the actual destination. Nonsense – e.g. Texas; you know the State of Texas is putting Amazon’s money in it’s own pot – and telling rich and poor entities alike – that they are getting their fair share – no matter where your tax went. This has to harm small counties – b/c that means their locals are nicked for a tax that goes to Austin not Main Street.

    - Second, once the drawbridge is down the barbarians will loot the castle. You already pay local taxes – property and so forth. How much extra tax can your community get over the internet? It’s peanuts (like AMT, or taxing the Rich), this is just a rounding error in any modern, bloated budget.

    - So the taxing agents will expand to tax sales outside their jurisdiction – probably using the “virtual presence” ploy on the retailer.

    - But this means that your taxation will go with you – they will tap the credit card companies, and the local retailers, and they will double tax those who are out of jurisdiction, and they will grant exceptions and special favors.

    Come on folks – that’s how they do it now!! This is a whole NEW TAX world – allowing instant and immediate gratification to the taxing Left if they can sign everyone on board.

    And it will discriminate against all small businesses and all American Taxpayer Businesses – China and Mexico and businesses operating in cash illegally with the wink and the nod will all be exempt. This only attacks the businesses here!

    And it is NOT FAIR – As my example shows, the retailer remitting taxes to other jurisdictions is not paying those taxes to his local authorities – to the extent they provide anything – so there will be a demand the retailer pay another tax based on the out of state sales.

    Frankly – I am alarmed by the privacy invasion, the data collection, the monitoring, the Big Brother like nature of the possibilities.

    Obviously the MFA knows this – that’s why they want a cap on sales of $500k – they want it to sound painless to the voters.

    But this means what?

    No small business will not be driven out of business – it means you will be driven to Internet Market Makers – RENT SEEKERS – like Amazon – or face the FULL Weight of Compliance which the FAVORED FEW, LIKE AMAZON, do not have to face. And the tax rates will be low – generally, so there will be little differentiation in competition on this basis.

    So there’s no worry? NO!! This means the govt will know everything about your customers – it opens up all of your business’s client accounts to every govt agency for the asking – based on taxation. They can pick the winners and the losers,

    and the market makers will be like Hollywood – No conservatives allowed.

    That’s what they are after. If you are a commie selling Che Guevara tee-shirts, you probably won’t even notice – they will tell you to sell through one of the approved market makers, e.g. Amazon, and you will never know the difference. But the collected money will disappear at the state capital – and a HUGE CHUNK will go to THESE GUYS WHO MAKE AND SELL THE SOFTWARE

    SEE – https://taxcloud.net/about/team/

    Hello?

  • FedTax

    I appreciate your passion and concern on this issue, and would welcome an opportunity to discuss over the phone. Our phone number is at the top-right of every page on TaxCloud, I am available at extension 1516 during business hours. There is no conspiracy here, but again, I appreciate your concern.

  • http://www.facebook.com/profile.php?id=667365734 R David L Campbell

    Let me guess… No call?

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  • GrumpyOleMan

    Sure. Kill another golden goose. About the only thing the government knows how to do.

  • GrumpyOleMan

    But this isn’t the state levying a tax. It’s the Federal Government.

  • tnemptynester

    I live in Tennesse and shop frequently via internet. Ihave been paying TN sales tax of 9 1/2% for several years. Companies like Avon,Walmart,JC Penny and many more companies are charging sales taxes plus shipping charges. Not all of the sellers on the internet are small Mom & Pop businesses. Even ebay has some big businesses who sell on e-bay. If the sellers on the internet are operating as a business than they should be charging sales tax. The problem is the sales tax has been taxed at the rate of the state,county and city where the buyer lives. Do the sellers send the taxes that were collected from the buyer to the state, county, and city tax collection departments? How does the seller pay sales tax to their state? Would buyers now have to pay two sales taxes?

  • Arithmetic Whiz

    “0.004%” is four thousandths of one percent, not four tenths of one percent.

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