Internet Sales Tax Favors Big Business, Impedes New Entrants

By José Niño
With estimates ranging from 10,000 to 12,000 sales-tax jurisdictions in the United States, an internet sales tax would result in a compliance boondoggle of epic proportions. (Pixabay)

American taxpayers may have dodged a bullet—for now. When Congress recently passed the gargantuan $1.3 trillion omnibus spending bill, they thankfully did not feature internet sales tax legislation, the Remote Transactions Parity Act (RTPA).

Nevertheless, we must remain vigilant, because tax-hungry politicians won't stop trying to ram through the RTPA in the near future.

Jason Pye of FreedomWorks raises an interesting point about the political class’s eagerness to pass this tax bill as soon as possible. Congressional leadership are looking for any way possible to beat Supreme Court justices to the punch before they hear South Dakota v. Wayfair, Inc. on April 17. This case deals with a South Dakota law that effectively challenges the 1992 decision in Quill v. North Dakota, where the top court determined that a state could not collect any form of sales tax from purchases made on the internet, unless the vendor had a physical presence in the state.

If passed, the RTPA would nullify the Quill v. North Dakota ruling and give state governments the power to collect sales taxes on internet purchases from businesses that are not within the state’s borders. The National Governors Association applauded South Dakota’s decision to use an “economic presence” test instead of physical presence to collect sales taxes. Even President Trump has voiced support for an internet sales tax.

The eventual passage of the RTPA raises several troubling implications for the future of e-commerce. 

With estimates ranging from 10,000 to 12,000 sales-tax jurisdictions in the United States, which have differing policies and varying rates of taxation, an internet sales tax would result in a compliance nightmare of epic proportions.

For retail giants like Amazon and Walmart, an internet sales tax is a dream come true in their quest to crush the competition. They can withstand heavy compliance costs, unlike their humbler competitors, so it comes as no shock that both firms have a long-standing record of favoring of internet sales-tax proposals.

Further, an internet sales tax would turn the concept of taxation without representation on its head, as citizens would be paying taxes to another state they don’t even live or vote in. State politicians would relish the opportunity to tax sellers in other states and not have to face the wrath of their constituents come election time.

While some opponents of the internet sales tax focus on how it threatens freedom on the web, economist Dan Mitchell correctly identifies what is truly at stake: tax competition. One of the beauties of the United States is her decentralized federalism that facilitates competition in policy matters concerning regulation and taxation. But this system could be put in jeopardy under an internet sales-tax regime. Instead of functioning as competing tax jurisdictions, states would become tax cartels, thus reducing the downward pressure on sales-tax competition between states.

The elephant in the room here is mounting debt and its pressure for ever more burdensome taxation. Governments at all levels should focus on getting their spending in check, not adding more layers of taxation. The official US national debt stands at slightly over $20 trillion, with state and local government debt totaling out at $3 trillion. (Both numbers conceal a mountain of unfunded liabilities.) A cornucopia of programs ranging from entitlements to bloated education bureaucracy should be put on the chopping block before even entertaining higher taxes.

One thing is certain: if the RTPA is signed into law, bureaucrats and established corporations will win at the expense of innovation, consumers, and small businesses.

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