Danny Diaz, spokesman for the Alliance for Main Street Fairness, was recently in Tennessee for one of his daughter’s basketball games. “The strip malls are empty,” he said.
“There are for-lease signs everywhere. When do we get to the point where these retailers just close up shop? … It is critical that we let these small employers compete.”
What Diaz is hyperbolizing about is what he considers an unfair subsidy for companies such as Amazon.com Inc. that sell products over the Internet. Go to your local bookstore, if you can find one, and you’ll pay the local sales tax. Order a book online from an out-of-state vendor and you will owe your home state a sales tax on it, too – but nobody will collect it. The Supreme Court has ruled, most recently in 1992, that states cannot order out-of-state companies to collect these taxes.
This disparity is indeed unfair both to the mom-and-pop retailers that Amazon’s critics like to talk about and to the larger companies, such as Wal-Mart Stores Inc. and Target Corp., that provide much of those critics’ financial support. Worse, it distorts the economy, because it means that Internet-based companies do better for reasons unrelated to their ability to provide good products to consumers at low cost.
Although Amazon’s critics have identified a real problem, their solution is a mistake. They want an Amazon tax that replaces one type of unfairness with others, and imposes costs on the economy out of proportion with any revenue it might generate.
Over the past two years, state governments have considered instituting such a tax as a way to help them balance their budgets. Eight states have already done so.
These states tax Amazon, which is based in Seattle, and other Internet businesses when they have affiliates or distribution centers inside their borders. But whether states may use this maneuver is the subject of litigation that seems likely to last a long time, and Amazon has sometimes responded by cutting off its affiliates or threatening to move its distribution centers.
Nobody, by contrast, questions the legal power of Congress to allow the states to tax e-commerce. So Sens. Dick Durbin, D-Ill., and Mike Enzi, R-Wyo., plan to introduce legislation authorizing states to form a compact. Internet-based companies would have to collect taxes when selling to a customer in any of the states that belong to it. But this solution has serious downsides.
Or let’s say you live by the border of a state with a lower sales tax than your state’s. You can drive across the border, buy goods and pay a lower tax rate. If the Amazon tax is in effect, though, ordering online from out of state won’t yield any tax savings. How is that fairer than the status quo?
A 2006 PricewaterhouseCoopers study found that small retailers have compliance costs of about 17 cents for each dollar of revenue. Diaz’s group favors exempting these small retailers from the collection mandate, which removes the minimizing distortions argument.
There are dueling studies about how much revenue state and local governments forgo by not collecting taxes from Internet sales. But experience seems to side with the low estimates. Rhode Island imposed an Amazon tax in 2009 – and its officials say that it has generated no revenue at all.
A far better solution would be for states to levy sales taxes based on where products are coming from rather than on where they’re going – or for Congress to tell them to do so. Under an origin-based tax rather than a destination-based tax, for example, Washington state would have the power to tax Amazon.com’s sales. For physical stores, sales taxes would keep being collected as before.
This would be a much simpler tax system with lower compliance costs. And it would tend to constrain sales taxes by increasing competition among the states.
To hear proponents of the Amazon tax talk, you would think that the principal flaw of an otherwise pure sales-tax system in this country is its inability to collect taxes from Internet businesses. In the real world, sales taxes are a chaotic mess, inefficient and unfair. States and localities often tax services one way, food and clothing another, and all other goods still another. They observe arbitrary tax holidays.
Origin-based sales taxes would eliminate the different treatment of Internet sales. They also might get state and local governments to rely less on sales taxes altogether – which would be a good thing. •
Ramesh Ponnuru is a senior editor at National Review and a Bloomberg View columnist.
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