Does the U.S. Really Need an Internet Sales Tax?

Recently I received an email from eBay’s Government Relations department urging me to write my Congressmen and ask that they oppose any federal legislation which requires online vendors to charge a sales tax. According to eBay, there are too many tax jurisdictions (allegedly over 15,000 in the United States) to make an Internet sales tax feasible. Further, the added costs and complexity involved with any proposed Internet sales tax would likely cause many small businesses to close.

I agree with eBay that an Internet sales tax is not needed (at least not yet) but I disagree with eBay’s self-serving rationale for opposing any such legislation.

The impetus for an Internet Sales Tax is to make up for revenue lost through online shopping where sales tax is not always required. According to a recent U.S. Census report, total e-commerce sales for 2007 were estimated at $136.4 billion, an increase of 19% from 2006. It is debatable what that means in lost sales taxes for state and local governments, but of the states that have sales tax, 25% of their annual revenue comes from sales tax collection. In spite of these alleged losses of revenue, I am far from persuaded that an Internet sales tax is justified for all web transactions.

First, sales tax is not the only tool local governments have for raising funds. As a homeowner, I have first-hand experience with counties raising revenue through increased property taxes. How tax assessors can increase property taxes while home prices nationwide have dropped is beyond me, but it is clear that there are other means local governments eagerly use to raise revenue.

Secondly, as senior tax attorney Bruce Gardner suggests, eBay is essentially nothing more than a glorified yard or garage sale where sales tax is never collected. This comparison works particularly well when applied to the bare-bone Internet site Craig’s List which literally is an online garage sale. Unlike most garages sales, the products auctioned off on eBay can cost hundreds if not thousands of dollars. Notwithstanding, there are still a number of small ticket items sold on eBay by small time vendors that merit the “taxman” turning a blind eye just as he does for garage sales.

The aforementioned argument, however, becomes problematic when considering mega retail websites that sell massive amounts of small ticket items. Specifically, I am referring to the 800-pound online gorillas Amazon and iTunes, the two are major players in retail sales for books and music. Under the current system, iTunes and Amazon have a distinct advantage over competitors like Barnes and Nobles which operate brick and mortar stores throughout the country and therefore are required to include sales tax with their online sales.

At first blush, it appears that the “unfair advantage” Amazon and iTunes have is all the justification needed for imposing an Internet sales tax. After further examination, however, the short-sightedness of this argument is readily apparent. If Congress makes it more expensive for Americans to buy from U.S. operated websites, consumers will simply buy products from abroad. Keep in mind that there is no duty that the government can impose on consumers when buying and downloading digital music and audio books from websites owned and operated by foreign companies. As a result, Congress needs to act gingerly when evaluating the net sum gain of imposing an Internet sales tax.

The last argument I found from proponents of an Internet sales tax is so outlandish that I could not refrain from commenting. According to the Federation of Tax Administrators (”FTA”), Americans who purchase items online without paying a sales tax are cheating the government. On the contrary, Americans are voting with their pocketbooks that online shopping provides competitive pricing and convenience. To the extent that online shopping is also preferred for not having sales tax charges, it is both a reflection that sales taxes are disfavored and that the public distrusts how the government uses their tax dollars.

To be discussed more thoroughly in my forthcoming post, the permeation of government mis-spending should cause consumers to question the benefits of paying a sales tax. Organizations like the FTA, therefore, should be more concerned as to why Americans do not want to pay sales taxes than they are with characterizing frugal shoppers as being unpatriotic.