NCPA - National Center for Policy Analysis

Internet Taxes

August 1, 2012

Allowing states to collect taxes on transactions occurring outside their borders is fundamentally unfair and threatens basic economic liberties. The persons paying and collecting the taxes (out-of-state retailers selling to in-state residents) do not have an opportunity to vote or otherwise participate in the government process that creates the tax or sets its rate, says John Nothdurft, director of government relations at the Heartland Institute.

Nonetheless, the taxing powers offered to the states by the Marketplace Fairness Act (MFA) would do exactly that. Advocates argue that such a measure will expand revenue options for cash-strapped states and place internet retailers on equal footing with brick-and-mortar competitors. However, this is far from the truth of the matter.

Regarding placing businesses on equal footing, it would be more accurate to state that an Internet tax law would further distort business optimization practices.

  • Businesses that maintain bricks-and-mortar stores are free to sell their products online, and in fact many or most do.
  • Thus, if the playing field isn't already level, a retailer can make it so by launching a website.
  • Consequently, a tax on Internet sales is really just a subsidy to businesses that refuse to make the transition to a blended retail model of bricks-and-mortar store with Internet sales.

Furthermore, an Internet sales tax would not provide windfall revenues. Rather, it would act as an enormous economic burden and job killer.

  • Currently there are more than 9,600 state and local sales tax jurisdictions in the United States.
  • An Internet sales tax would require online retailers to comply with the detailed, conflicting, ever-changing, and often-ambiguous requirements of all those jurisdictions.
  • A 2006 PricewaterhouseCoopers study found small retailers (less than $1 million in sales) already have compliance costs of 17 cents for every dollar they collect in tax revenue for states.
  • Additionally, according to the Tax Foundation, the only statewide Internet sales tax that has been fully implemented -- in Rhode Island -- has not gained revenue and has actually resulted in a net loss (Amazon closed its affiliate office in the state to avoid the tax, resulting in job losses.)

Further, an Internet sales tax would set a dangerous precedent for the taxation of all sorts of online products from various, unrelated jurisdictions.

Source: John Nothdurft, "Policy Tip Sheet: Myth vs. Fact -- Internet Taxes," Heartland Institute, July 19, 2012.

For text:


Browse more articles on Tax and Spending Issues