The fight over Internet sales taxes

The corporate and ideological motives behind the opposition

We’re more than 20 years into the mainstream Web era—20 years!—and Congress is finally seriously considering force retailers to collect sales taxes online, ending a loophole that has given online-only retailers an unfair advantage over physical retailers.

Thanks to a catalog company’s 1992 Supreme Court victory, states can’t require retailers that don’t have a physical presence within their borders to collect sales taxes on transactions done living in the state. That ruling predated the Mosaic browser by less than eight months, and combined with inaction at the federal level, it has given online retailers a serious leg up (as much as 10 percent) over their bricks-and-mortar competition.

When Congress considered legislation to fix the problem back in the (original) bubble, opponents argued that taxes would kill the baby in the cradle.

When online retailers turned into Baby Huey—and Amazon is the poster child here—they argued that it would be a logistical burden to collect sales taxes in the thousands of different localities—never mind that the Barnes & Nobles and Targets of the world have already had to do that with their online sales.

Now Amazon, having lost several battles with states over collecting taxes, and wanting to expand its physical presence to speed up its delivery, says it’s on board with a federal law allowing states. That leaves eBay to pick up the slack, as The New York Times’s Andrew Ross Sorkin writes in a very good column on Tuesday.

Its CEO, John Donahoe, sent an email to millions of eBay users (including me) this weekend urging us to bombard our representatives with complaints about unfairly taxing small business. And by “small business,” he means any business with less than $10 million a year in revenue. The so-called Marketplace Fairness Act, which just flew through the Senate, would mandate tax collection by companies with $1 million in sales and up. Sorkin:

Mr. Donahoe, who deserves credit for turning around eBay in recent years, isn’t trying to protect the mom-and-pop store or the struggling artist, he’s trying to keep substantial businesses with real revenue from paying taxes.

And Sorkin is great to call out eBay for trotting out, yet again, the misleading idea that the federalist patchwork of tax rates would make it impossible to collect the taxes:

Part of eBay’s argument is that it is too complicated and expensive for small merchants to collect the tax. “Are you prepared to collect sales taxes in the more than 9,600 tax jurisdictions across the U.S.?” Mr. Donahoe asked.

What Mr. Donahoe did not mention is that Amazon will already collect this tax for merchants if they ask, and eBay will help provide them with third-party technology services that will help them do this, too. There are a number of companies that will manage and streamline the process, like Avalara or TaxCloud.

By contrast, here’s The Wall Street Journal editorial page:

Mr. Enzi’s Marketplace Fairness Act discriminates against Internet-based businesses by imposing burdens that it does not apply to brick-and-mortar companies. For the first time, online merchants would be forced to collect sales taxes for all of America’s estimated 9,600 state and local taxing authorities.

New Hampshire, for example, has no sales tax, but a Granite State Web merchant would be forced to collect and remit sales taxes to all the governments that do. Small online sellers will therefore have to comply with tax laws created by distant governments in which they have no representation, and in places where they consume no local services.

Meanwhile, New Hampshire’s brick-and-mortar retailers will bear no such burden. They will not be required to collect taxes on the many customers who drive across the Maine and Massachusetts borders to shop in New Hampshire

First, it’s just not true that this is a burden that doesn’t apply to bricks-and-mortar stores. Again, online tax collection has always applied to retailers like Barnes & Noble, which has a robust online presence and stores in all 50 states plus DC. As far as bricks-and-mortar stores in sales-tax-free states not collecting taxes on border crossers, this seems like a comparatively minor problem since the combined population of those five states is 2.5 percent of the total US.

You know the WSJ is up to something when it argues against something because “big business and big government are uniting to pursue their mutual interest in sticking it to the little guy.”

So what’s the opposition really about? We find out only in the 14th and final paragraph:

More likely the new revenues will merely fund larger government.

Consider that a brushback pitch to the Republican-controlled House.

But the sales tax is a critical component of how most states and cities fund their governments—about one-fourth of their revenue, which has already been slammed by the economic downturn.

Meantime, one in six non-food retail dollars is now spent online, something that costs governments up to $23 billion a year. And online sales as a percentage of overall retail sales are still growing fast (h/t Matthew Yglesias):

The opposition to Internet taxation, in other words, isn’t about sticking the little guy (by the way, mom and pop retailers get hammered by the current Internet tax laws) or logistical nightmares. It’s about profit and competitive advantage for eBay and online retailers and and its about starve-the-beast for the WSJ and its ilk.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,