From the WSJ Opinion Archives
OUTSIDE THE BOX
The Taxman's Byte
Congress and the governors greedily eye the Internet.
And it came to pass in those days, that there went out a decree from Caesar Augustus that all the world should be taxed.
Two thousand years later Caesar Augustus politicians continue to believe that all the world--especially the Internet--should be taxed. That most Internet retail sales are exempt from state sales taxes they see as more than an irritant and a potential revenue loss; it is an outrage. "States can't just sit back and do nothing while e-commerce grows at warp speed!" Tommy Thompson exclaimed, back when he was governor of Wisconsin.
The crux of the argument is that the seller of goods over the Internet, just like over-the-counter sellers, should be required to collect the sales tax from each of its customers and remit it back to the state where the purchase was made. It is a matter of fairness; if the local merchant must collect sales taxes from in-store customers, his Internet competitors must also collect them, for otherwise the local merchant is at an economic disadvantage.
But wait a minute. The in-store customer benefits from a great many state and local services--highways, police, garbage collection, planning and zoning procedures and so forth. The distant buyer does not enjoy these benefits. When I, a Delaware resident, buy from, say, a Michigan-based Web site, I consume no services, drive no highways, pollute no air and cost Michigan nothing. To the contrary, my purchase helps the Michigan economy, supports jobs and creates wealth in the state. So why should I pay anything to the government of Michigan?
Come to think of it, maybe the guys in Lansing ought to be giving me discount coupons to shop there, because I add value to their economy and cost them nothing.
Consider the humble handkerchief. Forty-five states impose sales taxes; some tax clothing and some do not. Among those that don't, some say handkerchiefs are clothing and don't tax them, others say they are not and do. County and municipal handkerchief rules undoubtedly vary as well. Requiring a seller to collect and remit sales taxes to each of them would be an enormous, expensive and very complex task. A 1998 Ernst & Young study estimated that the collection and compliance costs for a national retailer might come to 87% of the tax collected.
Such a tax-collection system is not currently required for two reasons. First, the Congress placed a three-year moratorium on Internet taxes (it expires in October). Second, a 1992 U.S. Supreme Court decision exempts catalog--and thus Internet--sales from the sales tax unless the seller maintains "an actual physical presence" within the jurisdiction.
But as the court pointed out, Congress has the power under the Commerce Clause to permit such taxation. Which is exactly what the National Governors' Association and the governors of most states want it to do. The 45 states that have sales taxes see enormous revenue potential if they can just tap into the Internet and catalog sales streams. States don't want to "sit back and do nothing" lest they miss a large slice of the Internet revenue pie and the annual $632 billion in catalog, direct mail and telephonic sales which are currently exempt.
But too much greed is unbecoming, so states don't argue it that way. Nothing should be tax-free, they argue. But the Internet isn't; approximately 18% of the cost of using the Internet is taxes of various kinds. The states also argue that Internet sales are eroding their sales-tax base so dramatically that vital state services will be devastated. They conjure up visions of understaffed policedepartments, underfunded schools and suffering children.
But that seems far from the truth. A Commerce Department study found online sales in 2000 amounted to only 0.8% of retail sales, and a 2000 Forrester Research study projected the states would lose $5 billion in 2004. Total sales-tax collections by states in 1999 were $309 billion, so the loss is far from devastating. Eighty percent of Internet sales are business-to-business, which are exempt from sales taxes. Add in exempt financial and transportation transactions, and only about 13% of Internet sales are even taxable.
Ah, but won't Internet sales soon grow to replace most retail sales so that sales tax revenue will be devastated? That's doubtful, for local commerce is not going to disappear. You're not going to buy a quart of milk online, or a roll of paper towels, a sack of potatoes or a pack of Pepsi. Gasoline and liquor will still be sold directly; from Wal-Mart to Nordstrom, retailers will continue to sell goods over the counter.
Retailers also fear a second tax bite. If they agree to collect sales taxes for a state, might that not be enough "nexus" for the states to claim the retailers now owe every state some income tax?
Finally, there is an underlying suspicion that what the governors really want is a national sales tax. Once there are common definitions and a retailer collection system, it is a very short step to creating a national sales tax system and extending it to all tax jurisdictions.
So it may come to pass in these days, that there will come out a decree from Congress that all the people should be taxed--just one more time.
Mr. du Pont, a former governor of Delaware, is policy chairman of the Dallas-based National Center for Policy Analysis. His column appears Wednesdays.
