Free Market

In Opposition To An Internet Sales Tax

“In levying taxes and in shearing sheep it is well to stop when you get down to the skin.” —Austin O’Malley, Keystones of Thought

Over the decades, Americans have been programmed to believe that they all must “pay their fair share” for the multitude of infrastructural provisions, assumed by lawmakers over the last century to be the responsibility of the state. “Fair share” means different things to different people; for some it’s a flat rate, for others it’s a dollar amount. Most tacitly agree that taxes are legal, necessary, and just. For this reason, it is difficult for principled arguments against taxation to gain solid footing, because we repeatedly and without much protest have allowed so many “reasonable” taxes.  Precedent for taxation is further strengthened every day with the expansion of leviathan government into new market frontiers.

For the last 20 years one frontier to largely escape the pervasive reach of the tax man has been e-commerce.  However, politicians have been foaming at the mouth in recent months at the idea of an internet sales tax.  The last legislative session here in Utah saw SB 226, a sales tax on out-of-state internet transactions (sponsored by Republican Wayne Harper), advanced in the Senate despite concerns from legal counsel that the bill would likely not pass constitutional muster.  It was later defeated in the House despite heavy lobbying from brick-and-mortar retailers like Schubach and RC Willey.

The U.S. Senate has also moved on a bill to tax all internet transactions, amending the current rules requiring a physical nexus or domicile in the state charging the tax. Conservatives and liberals alike parrot these bills as “leveling the playing field” or creating “fairness” for those strip mall business owners and others who are currently forced to pay a tax that the likes of Amazon are at times able to avoid.

These small business owners are certainly sympathetic characters.  They are the proverbial David taking on Goliath, but without stones for their sling. They are required to collect taxes that their competitors don’t, by virtue of their business model and location. Many of them believe that simply making internet retailers pay “their fair share” will lead consumers to ignore the convenience and price disparity of shopping online, sending their sales through the roof.

I take a different view. One of the reasons some internet retailers like Amazon support or are indifferent about an internet sales tax is that they know they have significant advantages over the average brick and mortar business that have nothing to do with taxation. They have enormous economies of scale resulting from extensive distribution networks, advertising reach, volume discounts, etc., which get passed along to customers. The only thing these efforts will accomplish is the extraction of yet another tax, which is frankly as good as flushing money down the toilet. If any of these proposals came with concurrent and proportional decreases in overall tax rates, they would be much easier to justify, but that is never discussed. These tax proposals represent additional money for the government to spend, not simply a rebalancing of tax liabilities across market segments. As is always the case, these tax hikes, supposedly shouldered by businesses, will simply be passed through to the consumer, further hindering any economic recovery.

Here’s a better idea. If fairness is the goal, and if we recognize that the government wastes more of our tax dollars than it productively employs, why not work to eliminate the sales tax altogether? This would give brick-and-mortar businesses a chance to compete for a larger pool of available dollars without burdening consumers with another hidden tax. Some will say, of course, that this proposal would never work; after all, an ever-expanding state is always going to get its pound of flesh. Critics would further point out that a sales tax is much more preferable than an income tax hike, and that is true.

But these criticisms reveal the true motives behind the political push for the internet sales tax. Internet taxation has never been about each business paying their fair share. Rather, it’s about Uncle Sam increasing his share at the expense of consumers, under the guise of a level playing field, to fund more social and corporate welfare schemes. This is simply a symptom of government living beyond its means and internet businesses have become the bogeyman in a manufactured dispute.

Regrettably, many local businesses have joined in the witch hunt. Instead of seeking to reduce the inequitable burden placed upon them by the state, they want to also saddle others with the same burden—much like a disciplined child who derives some twisted happiness from seeing his brothers and sisters receive the same punishment.  Rather than adapting more fully to a changing business model, they have chosen to support tax increases to stick it to those pesky online stores which save consumers way too much money.

If in-state, brick-and-mortar businesses want “fair” competition with online businesses, they ought to advocate for lower taxes across the board, not tax increases that reduce the amount of disposable income in their customers’ wallets. Reducing or eliminating the sales tax puts more money in the hands of local consumers, a good deal of which would be spent locally. The more money people have, the less they quibble about spending an extra $20 on a pair of corrective lenses; especially when they can walk out of the store with them on their face and avoid the cost and delay of shipping. In this way Schubach, RC Willey, and others could capitalize on one of the few advantages they have over online stores, while making life better for all Utahns.