It's time to end the e-commerce sales tax holiday

When I buy a book at the book store in my town they charge me 7 percent extra to send to the state of New Jersey. But when I buy it from Amazon.com I don't pay the 7 percent. It's a great deal for Amazon.com and for me, but it's fundamentally unfair. It's time to end the distinction.

I'm one who believes that taxes, as a general matter, should be kept as low as possible. This isn't about revenue -- it's about fairness. There's no logical reason why retail businesses with a physical presence should have to collect sales taxes but e-commerce (and phone/catalog) retailers don't.

Incidentally, Amazon may not be legally obligated to collect the sales tax, but as a consumer I'm still legally obligated to pay use tax on it (and, of course, I always pay it, dear state authorities listening in on my writings). To some people the issue might be that Internet commerce shouldn't be taxed, and this is either a pure libertarian argument or an argument that e-commerce should be encouraged. Both arguments fail.

A libertarian argument against sales taxes is one thing, and I might even make it myself, but there's no libertarian argument for discriminatory application of taxes. If it's unfair or unwise to tax e-commerce, it's just as unfair or unwise to tax brick and mortar commerce. Remember, sales taxes are supposed to be consumption taxes, not taxes on the business. I can tell you from personal experience that businesses pay plenty of taxes on their own without selling a cent of merchandise.

E-commerce is the Present, Not the Future

Many people would argue that we should encourage e-commerce because it's "the future" or some such airy nonsense. Many people (including, it seems, Bill Clinton, who signed the bill) seem to think that the Internet Tax Freedom Act of 1998 and its three extension acts created or preserved this rule, but they didn't. Those laws just barred discriminatory taxes against Internet access or e-commerce.

If the argument for encouraging e-commerce is to help it get off the ground, well fine, it's off the ground. In fact, it's up in the stratosphere. Let's grant that this was one of the goals of policy (even though it wasn't); that goal has been met. E-Commerce has, in effect, enjoyed a sales tax holiday so far. There's no reason for it to continue.

The legal reason why e-commerce is exempt from collecting sales taxes goes back to a couple of Supreme Court decisions, the Quill and National Bellas Hess cases, which held that merchants engaging in interstate commerce could not be held to collect sales taxes in remote jurisdictions in which they had no physical presence. The case is often made that the reasoning for the distinction is that it would be an unreasonable burden on businesses to have to keep track of all the various tax rates and conditions as well as all the remittance procedures. But in fact the legal reason is just that there is no legal authority for states to require such collection of businesses over whom they have no jurisdiction. This problem could be dealt with simply by Federal legislation authorizing such requirements.

Share the Burden Equally

Now, to the issue of the burden, and this is where it gets interesting: At the same time as it authorizes remote sales tax collections the Federal government could help to make the process easy. Imagine a web service funded by a small commission which acts as an Interstate sales tax clearinghouse. States need to provide data to the clearinghouse using a defined XML schema on what sales tax rates apply to which 9-digit zip codes in their states. When merchants sell to US residents in a jurisdiction in which they have no "substantial nexus" (as the Supreme Court called it), they must remit the appropriate taxes to the clearinghouse which collects their commission and passes on the revenue to the state.

The burden imposed by this scheme on the e-commerce merchants is really, really small. The real problem with it is that transactions that have been tax-free will now include sales taxes and this will tend to discourage their business. Look for the e-commerce lobby to hit Congress hard if such a thing ever gets serious consideration.

Even if, as a practical matter, this amounts to a tax increase, it's not one in principle. This is an equity issue. E-commerce has enjoyed an unfair advantage over brick and mortar commerce for too long. If tax rates are too high they should be lowered for all merchants. But what's going to happen if this were to be enacted is that states would realize a lot of new sales tax revenue, their cost of collection would go down, e-commerce growth rates would be hindered, and brick and mortar stores would gain. You could argue that this would be a fair outcome.

Photo Credit: David Beyer

Larry Seltzer is a freelance writer and consultant, dealing mostly with security matters. He has written recently for Infoworld, eWEEK, Dr. Dobb's Journal, and is a Contibuting Editor at PC Magazine and author of their Security Watch blog. He has also written for Symantec Authentication (formerly VeriSign) and Lumension's Intelligent Whitelisting site.