WSJ Columnist Says Real World Needs E-fairness

May 21, 2008

As booksellers in New York, Texas, and other states work to advance e-fairness and the equitable collection of sales tax, the issue is gaining national prominence. Here is a recent column from the Wall Street Journal's Lee Gomes, who questions why "Internet moguls should continue to benefit from a tax loophole that hurts parks and schools, and makes it harder for your neighborhood bookstore to keep open for business."

Real World Needs 'Net' Taxes

Do you think that billionaire Internet moguls should continue to benefit from a tax loophole that hurts parks and schools, and makes it harder for your neighborhood bookstore to keep open for business?

I didn't think you did.

In that case, cheer on New York and Texas as they chip away at the popular but grossly unfair advantage enjoyed by the Amazon.coms of the world. Online retailers don't have to collect sales tax on the items they sell if they're "out of state" companies.

Now, chances are you've ordered a tax-free book or two from Amazon, and enjoyed the experience. No one likes paying taxes. But this particular tax break is an especially pernicious one.

For starters, by giving online businesses a permanent advantage over their bricks-and-mortar competitors, it helps those who need it least -- huge, profitable e-commerce companies -- at the expense of often-struggling local retailers.

In addition, the tax policy is regressive. It disproportionately benefits the upscale citizens most likely to shop online. Worst of all, as commerce increasingly moves online, state and local governments are being deprived of the sales-tax revenues they rely on to run schools, build roads, pay police and firefighters, and do all the other things they're supposed to do.

A dozen years ago, one might have been able to make the case that a holiday on collecting sales tax would help the fledgling Internet get off the ground. I don't think that was particularly true even in 1996; it certainly isn't now.

Remember, the Amazons of the world aren't even paying this tax. You pay it; they merely collect it. (By the way, if you don't pay sales tax on a purchase, you usually are required to pay a "use tax" on it when you file your state tax form, though most people don't do it, or even know they're supposed to.)

Under current law, e-commerce companies are required to collect sales tax only if they have a direct connection, called a "nexus," within the state. A warehouse is a nexus.

A New York law now being challenged by Amazon declares an affiliate marketer to also be a nexus. These are the people and companies whose Web sites send users to Amazon in return for a percentage of a resulting sale.

The U.S. Supreme Court said in 1992 that because of the way the economy is evolving, out-of-state mail-order companies are soliciting business in a state even if they're doing so "by a deluge of catalogs rather than a phalanx of drummers." Affiliate marketers are just the next step in this progression, and one hopes the courts see them that way.

In Texas, state officials are investigating whether an Amazon distribution facility in Irving is a nexus, in that it is operated as a wholly owned Amazon subsidiary. That one seems like a no-brainer.

Amazon says it obeys all tax laws, that it will collect the New York tax even while the case is in the courts, and that it will abide by whatever Texas officials decide.

You'll hear a lot of specious arguments from tax-collection opponents. One is that state and local tax codes are too complex to follow. That idea played a big role in the Supreme Court decision. But 22 states have since simplified their sales-tax policies as part of Streamlined Sales Tax Project. They now, for example, all define "food" and "candy" the same way.

What's more, keeping track of local tax codes is easy with computer databases. Amazon, for instance, has no trouble figuring the sales tax on products offered through partners such as Target, which have actual stores across the country and, thus, no excuse to not collect a tax.

Opponents of the tax collection are fond of the effective but dishonest slogan that collecting a sales tax would amount to a new "tax on the Internet." But making Amazon collect sales tax on books is no more "taxing the Internet" than requiring stores to collect taxes on Valentine's Day chocolates amounts to "taxing falling in love."

The Supreme Court in 1992 specifically said Congress can give states the power to compel out-of-state companies to collect the tax on their behalf. Even if mom-and-pop Web operations were exempted, which is a good idea, such a law faces an uphill fight.

Many Web users surely will be annoyed by a tax. It's common to see the Internet as a refuge from the quotidian annoyances of the real world, among them death and taxes. But cyberspace is grounded in the real world, as are schools and parks and streets. If you doubt that, the next time your house is on fire, try calling Jeff Bezos.

Reprinted with permission from the Wall Street Journal.

Topics: Sales Tax Initiative, Internet Commerce,