NCPA - National Center for Policy Analysis

Taxation without Representation

September 22, 2011 has been in a decade long battle with governments in various states over taxing online purchases, says Veronique de Rugy, a senior research fellow at the Mercatus Center.

Now some in Congress want to give the whip hand to state tax collectors with the so-called Main Street Fairness Act.  The bill would allow states to impose taxes on interstate commerce, something usually blocked by the Commerce Clause of the U.S. Constitution.

  • Many policymakers and journalists believe that the skirmish between Amazon and government is part of a larger fight over whether or not federal, state, or local legislators should "tax the Internet."
  • The no-taxes side largely ignores the fact that the Internet isn't really a tax-free zone -- states can collect sales tax on online purchases only if the retailer has a physical presence in that state.
  • On the other side, the arguments offered bypeople who would like to extend the sales tax to interstate internet purchases are rarely valid.
  • States claim such taxes will help them cover their cumulative $130 billion budget deficits.
  • States also argue that since online shoppers already owe the tax through the use tax obligation, retailers need to be pushed to collect what consumers won't otherwise cough up.

After exiting several states, Amazon is promising jobs and investment in exchange for a tax exemption in some states where it has a physical presence.  However, if Amazon succeeds the results would be the equivalent of corporate welfare:  One company will get special tax treatment unavailable to others.

There are better ways to level the playing field.  One solution is for states to cut taxes on in-state vendors.  Another option is an "origin-based" tax regime, under which states would exercise their right to tax equally all sales inside their borders, regardless of the buyer's residence or the ultimate location of consumption.

Source: Veronique de Rugy, "Taxation without Representation: Tax-Hungry States Go after Out-of-State Retailers," Reason Magazine, October 2011.


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