Kevin Delaney 12/20/99
It seems unfair. Local merchants must pay a local sales tax. Internet companies do not. This gives Internet companies and "unfair" advantage. To address this inequity, Walmart (who is horrified that the Internet might do unto them what they did unto main street) has joined forces with local politicians (hoping to dip their hands into the lucrative stream of Internet commerce).
However, the situation is a little more complex than one might first suspect. Local taxes are used directly for local services. Many of these funds go to paving local roads, lighting local streets, and providing police and fire protection to local merchants. Extending this tax to Internet companies means that Internet companies would pay for services for which they received no benefit. It would actually create a reverse injustice--a situation where Internet companies pay for services consumed by their competitors.
To make things worse. Extending local sales tax to the Internet would lead to taxation without representation. Currently, sales taxes are set by about 30,000 different city, county and state entities. Internet companies do not have representation in all of these entities. Because Internet companies have no representation, there is nothing to prevent local politicians from jacking up Internet taxes to unreasonable levels.
Of course, you can argue that it is the business who pays the sales tax, but the consumer. But with this argument, we launch into the nasty Constitutional question of double taxes. If the sales tax is really a tax on people, and not on businesses, then that means the sales tax is double taxation.
Extending the current sales tax system to the Internet would create as much an injustice as the current zero tax system. Administering an Internet tax system would be a total nightmare. Local stores only have to deal with their local city, county and state. Internet companies would have to deal with 30,000 city, county and states. Taxation on the Internet would be a total nightmare. Internet companies would be forced to spend millions of dollars on tax compliance. The process of collecting and distributing the taxes would be subject to errors, inefficiency and fraud.
The current sales tax system in the United States is untenable. Rather than extending the current sales tax system to the Internet. The issue of Internet taxes requires a complete rethinking of the sales tax system. The tax issues Walmart complains about are real. Because Walmart has stores in all 50 states. They would have to pay Internet taxes on all sales. While a competing web company would only have to pay sales tax in their home state. The system does not work.
The sales tax issue is not a simple problem with the Internet. The current sales tax is already on the brink of failure. The sale tax is based on location. As people become more mobile, the sales tax system breaks down. If you follow your local news and community politics, you will see that cities, counties and states are fighting fierce battles over this issue. Stores specifically locate new outlets outside city limits to avoid local taxes. Cities battle with counties to re-incorporate these retail locations to recapture the lost revenue.
Businesses pay close attention to taxes, and are apt to make important business decisions based on tax issues. For example, they may choose to locate outside city, county or even state limits for a tax advantage. Whenever a business makes a decision for tax reasons rather than for the composition of the market, they are less efficient. The sales tax system fuels suburban sprawl, and rewards companies for making decisions that would be less optimal in a truly free market.
Locating the new Walmart in Jefferson County instead of Washington County means transferring of hundreds of thousands of tax dollars from one county to the next. As a result, local politicians try to woo large retailers, and are apt to raise taxes on small main street retailers to provide services and tax breaks for the Walmart.
A tax district with few residents and a lot of stores will have more tax revenue per capita than densely populated areas. The current sales tax system is directly responsible for many of the inequities in education funding. A city with low property values and a low resident per store revenue ratio will have less to spend on a neighboring community with many stores. A hundred years ago, cities sought both growth in population and business. Today, they battle for businesses, while passing zoning laws that prevent the construction of low cost high density housing.
The mobility of the American consumer has created a situation where the sales tax system is both inefficient and inequitable. In many regards, the problems with an Internet sales tax, is just another sign of a broken sales tax system.
The Internet is currently the least taxed, and least regulated industry in the American economy. As a result, the Internet is producing jobs, opportunities and wealth at a feverish pitch. The Internet and computer technologies have led us to one of the longest sustained periods of growth in our nation's history. This growth has come without the social chaos, inflation, and massive environmental degradation of past industrial booms.
Conservatives use the Internet as a case in point to show that excessive taxation stifles growth. The Internet has done well without government regulation. Places taxes on Internet sales simply takes money away from a growing economy, and have it disappear in the bottomless hole of inefficient government spending.
On the other hand, the sales tax is a consumption based tax. Currently the US places the heaviest taxes on incomes and capital gains. By putting the tax burden on production, we have created an artificial system that encourages people to save less and spend more. This imbalance in taxes leads to a higher trade deficit, and is likely to have led to a wider gap between rich and poor.
The issue of Internet sales tax is not a simple. Although there is an issue of fairness, extending sales taxes to Internet goods replaces one injustice with another. The ultimate solution will require a complete overhaul of the sales tax system, and might even need require changes to the overall income tax system.
You can find information on the Walmart coalition at www.e-fairness.org. You can find information on the opposing view at www.e-freedom.com.
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