Sales taxes account for about one-quarter of all tax revenues collected by states and localities to pay for education, public safety, health programs and other services. They may not be as fair as a progressively indexed income tax?flat-tax fans would like that?but in most states they are an essential component of the tax structure. Yet the champions of tax-free cybercommerce insist that Internet businesses be given a pass when it comes to funding necessary government functions.
The No-Net-Tax crowd argues that Internet sales are more akin to out-of-state mail-order sales than cash-register purchases; mail-order firms are not taxed, therefore... Case closed. But this basic premise is wrong. Sales taxes are levied on the buyer, yet they are collected by the seller, who then sends the money to the government. If you buy by phone from a L.L. Bean catalog, you still are obligated to pay sales tax?but not through the retailer. Instead, you're supposed to forward the tax payment to your state capital. Technically speaking, all you good citizens who shop by catalog or online and don't pay sales taxes are tax cheats. Of course, no one pays these taxes, but that's not because there's an established tax break for those who shop this way. It's because there is no collection mechanism. A 1967 Supreme Court ruling declared that businesses could not be compelled to collect sales taxes from consumers in states where they do not maintain a physical presence. The court reasoned it would be too much of a pain-in-the-bookkeeper for businesses with mail-order customers across the country to gather sales taxes that would have to be sent to dozens of different state revenue offices. The law did not create a sales-tax exemption for mail-order transactions.
In the computer age, collecting and forwarding sales taxes on mail- or phone-order sales should be no problem. Certainly Land's End could find software that would calculate how much tax to collect from these sales and determine where to send the money. (And a 1992 Supreme Court decision noted that Congress had the power to force such sellers to charge sales taxes.) Such software could easily be applied to Internet sales.
In 1998, President Clinton signed into law legislation that imposed a three-year moratorium on Internet-related sales taxes and set up the Advisory Commission on Electronic Commerce, which is supposed to study the "remote sales taxation issue." Its report to Congress is due this April. The National Governors Association, under the guidance of Republican Utah Gov. Michael Leavitt, has proposed a system in which a third party?such as a credit card company?would gather the sales tax on Internet commerce and, using high-tech software, zap it to the proper governmental recipient, for a slight fee.
A band of conservatives and Republicans?including Virginia Gov. James Gilmore, Rep. John Kasich, members of the National Taxpayers Union, Americans for Tax Reform, the Heritage Foundation and the Cato Institute?have called for legislation to prevent states and localities from collecting sales taxes on Internet purchases. And conservative policy shops in Washington have been churning out a blizzard of faxes and studies opposing an Internet sales tax. Lisa Dean, vice president of the Free Congress Foundation, recently warned?with a touch of melodrama?that the "greatest development of modern times, namely, the Internet" could be "regulated out of usefulness," if Internet sales are taxed. California Gov. Gray Davis, a Democrat, has sided with the advocates of a tax-free Internet. "This industry, which is powering the new economy, providing jobs and newfound wealth for many Americans, is only eight years old, it's an infant, it's too early to tax it, and we should extend the moratorium," he says. No surprise there: Davis has Silicon Valley to make happy.
But why do Internet sales deserve any break? Maintain the tax moratorium, and Internet businesses will have a powerful edge over Main Street businesses that must charge the sales tax. This is cybersocialism, with the right-wingers seeking a government preference for Web-based firms. "As an economist, I believe various forms of enterprise should compete with one another," says Henry Aaron, a senior fellow at the Brookings Institution. "I don't see any substance [to the arguments for an Internet tax break]. All you hear is rhetoric extolling the wonders of the Internet and heavy-breathing about its potential to change society and that it would be a shame if government squelched new technology. But here we have a technologically advanced enterprise with a real efficiency advantage that allows it to present a wide range of choices to consumers and maintain lower inventories [than street-front stores]. These are real strengths. It doesn't qualify for special treatment... Why should the government subsidize Internet sellers in competition with retail shops? Why should either be favored?"
As more commerce shifts from real stores to virtual shops, the revenue consequences for states and localities could become severe. The Center on Budget and Policy Priorities estimates that, four years from now, local governments could lose $15 billion in taxes due to catalog and cyber sales. And if Internet sales are exempted from taxes, low-income consumers who cannot afford computer equipment will end up paying a disproportionate share of state and local sales taxes. An erosion in the tax base could prompt states and localities to raise sales tax rates, which would further whack low-income people.
One needs little imagination to picture the schemes that would be cooked up to exploit a permanent Internet tax break. Circuit City could place computer terminals in its stores and direct customers, once they've inspected the goods, to make their purchases through the company's website, rather than at the sales counter. Sign on, provide your credit card number and then immediately walk over to a sales clerk and pick up your merchandise?tax-free. Say goodbye to the sales tax?and much of what it funds. And that's the point: Keep the Internet tax-free and there will be pressure on states to find other revenue sources or to slash programs. The cons leading the charge on this battle would not be sorry to see local governments end up in such a bind.
This fight?in substance, not rhetoric?is not as much about the Internet as about taxation itself. Sure, it's fun to shop online and avoid paying an extra eight percent. But it would also be a kick to get a paycheck without having to hand any of it to the IRS. The bottom line is that Internet commerce is not something special that warrants preferential treatment. But for antitax cons, this issue provides them an opportunity to strike against their favorite target?taxes?while portraying themselves as allies of the hip, gee-whiz technology of the future. Surely, cyberexecs who benefit will be grateful and perhaps generous in campaign contributions and foundation donations. Here's a way for the right to prevent money from flowing into government coffers and to lay a claim to Silicon Valley bucks. What a twofer.
History Lesson The libertarian conservatives of the Cato Institute have one of the busiest fax-blasters in Washington. Several times a day, I receive press releases from this outfit, each one referring to yet another initiative to discredit government. To capitalize on the faux end-of-the-century silliness, Cato recently faxed news of its study, "The Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100 Years." The report notes that "almost every indicator of health, wealth, safety, nutrition, affordability and availability of consumer goods and services, environmental quality, and social conditions indicates rapid improvement over the past century." That's a news flash? Couldn't the same have been said in 1899?
Cato credits free enterprise for our 20th-century success, and cites an increase in the size of government as one of the few negative trends of the past 10 decades. But if one thinks about their list of positive trends for a moment, Cato's view?government bad/commerce good?is undermined. The air, Cato says, is 97 percent cleaner. But it was government agencies, such as the Environmental Protection Agency, that forced polluting corporations to clean up. (As far as I can tell, Cato analysts have never met an environmental regulation they like.) Wages are up since 1900. No thanks come from Cato for the minimum wage laws that helped fuel wage growth. Electricity is widespread, indeed, partly due to government rural electrification programs. Deaths caused by infectious diseases are down. Let's give credit to public health agencies. Home ownership is up. Hail the income tax deduction for mortgage interest?a government subsidy?and federal and state programs that encourage home-buying. The work week, Cato claims, is 30 percent shorter. It may not feel that way to most of us, but that stat should cause us to appreciate unions and workplace legislation. Accidental deaths are down, yet Cato has never cheered the Occupational Safety and Health Administration and workplace safety standards. The income of African-Americans has increased tenfold. But would it be that high had there been no affirmative action, no passage of civil rights laws and no enforcement of these laws? Remember, such laws were opposed by segregationists as illegitimate governmental interference in free commerce.
Yes, there's been progress these past hundred years. But not because corporations were permitted a free hand to do whatever they wished. This is a good point to keep in mind as we enter a new millennium. Cato and other laissez-faire cowboys will be arguing for fewer rules for the international corporatists of the go-go global economy, promising that no restraints will bring riches for all. Those truly familiar with the history of this century know better.