A Good Tax

Yes, I think this tax will help States and the nation:

As a rule of thumb, it’s best to be skeptical of politicians and journalists who describe their pet policy preferences as “common sense.” Unless it involves renaming a post office, pretty much any piece of legislation that gets brewed up in Washington will, by necessity, involve tough trade-offs between values and interest groups. 

But there are exceptions, and today, I’d like to cautiously suggest Congress has hit on one. The Senate is preparing to vote on a bill that would finally let states make online retailers collect sales taxes. Majority Leader Harry Reid has cued up a vote, and the measure is expected to have more than enough support to clear a filibuster.

So far as big pieces of legislation that will impact billions of dollars in commerce go, this bill might be the closest you’ll get to a no-brainer.  Thanks to a 1992 Supreme Court decision, Quill v. North Dakota, states today can’t force merchants to collect sales taxes unless they have a physical presence, such as a store or office, within their borders. Those tax dollars are still very much owed, but it’s up to the shopper to pay them as part of their state return. Of course, almost nobody ever does. The upshot is that a ruling made back when Lands End catalogues were still at the cutting edge of retail has given online stores a leg up on their brick and mortar competition, while costing states a bundle of tax revenue — anywhere from around $12 billion to $23 billion annually, depending on the estimate. 

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  • Jeremy

    I’m a bit mixed on this. On one hand, the states are losing revenue like mad as people buy online instead of local. However, this is going to be devastating to smaller online retailers as they have to manage thousands of tax codes/rates across the country. Personally, I preferred the proposal of a flat universal sales tax that would be much simpler to manage.

    Amazon is for it, of course, as they already have plans to expand into every state. This law allows them to keep their edge while placing a significant burden on their competition.

  • Robin

    This tax is (a) good for states who want to increase revenue (b) terrible for small online retailers since such compliance is effectively impossible and (c) good for large online retailers due to point b (Amazon is strongly in favor of it – when is the last time you heard about a for-profit company asking to be taxed more?)

    Megan McArdle pointed out yesterday that it would take Amazon about 15 minutes to get compliant. But if I am on Etsy, or if I have a small local business that sells vintage books online, there is no possible way for me to (1) know the tax law in all 50 states (2) charge differential prices based on whether the state has a 5%, 6% rate, or exempts my product altogether (3) file 50 separate tax returns monthly. Heck in some states you are required to file once sales have been registered, but in Kentucky retailers must make an anticipated sales tax payment prior to each month and are then reimbursed…plus they get a kickback for cooperating with the revenue department.

    If this bill is passed the only people with (legal) online presences will be companies large enough to hire 5-15 accountants full time…I guess the other option is that a niche business arises that takes all of your receipts and keeps you compliant, files your taxes for you, etc. Either way it is much harder on small retailers than it is on Amazon or the big boys.

  • E.G.

    Why not just a national sales tax – redistributed to the states on some basis of need+population – and get it over and done with?

    Otherwise, this sounds like a big pain in the neck, particularly for small, independent online retailers.

    (And a boon for accountants and tax lawyers.)

  • Dave

    Robin is correct. The “rule of thumb” is that whenever legislation is marketed as punishing the large, entrenched corporate interests, it inevitably does the opposite. Legislation is written to protect the big guys from competition by smaller, more nimble competitors. Why would it be any other way? The big guys are the only ones that can afford to lobby.

  • Robin


    The biggest problem is the impact it would have on the rest of the tax system. Some states, like Tennessee, have decided to avoid an income tax and have done so by having very high sales taxes. In Nashville I think it can get up to 9% or so. If all they got in the future was the revenue from a 5% national sales tax, they would have to redesign their entire tax system.

  • Robin

    What you could have though is universal administration rules with state-specific rates…so all retailers only have to complete one form, submitted on the xth day of the month to a national clearing house, but allows states to preserve the individual rates wthin the universal administrative framework.

    State would have to agree on quirky things that junk up the administration.

    Most states have been working on voluntary compacts for this purpose. You can google streamlined sales tax for the framework. Kentucky has been participating with about 20 other states.

  • Joe Canner

    From what I understand, the concerns about the impact on small online retailers are, in part, addressed by the fact that it only applies to those with $1 million in annual sales and by the requirement that states provide retailers with software to help manage the payments. I’ve heard trade groups complain that the $1 million threshold is too low, but we’ll see.

    In any case, this seems like a great opportunity for enterprising start-ups to serve as clearinghouses for sales tax payments: you tell me how much you sold to what locations and I’ll tell you how much you owe in total and make sure it all gets parceled out correctly (for a small fee, of course).

  • I am not opposed to taxes or even online sales taxes, but there just is not the infrastructure that supports this. I have a friend that is starting a a small gluten free bakery. They are online only. Selling only on our state for fear of this. He is an accountant with a history of sales and use taxes. But even complying with just our state taxes takes him a couple minutes per sale.

  • Phil Miller

    Now my advice for those who die, (Taxman!)
    Declare the pennies on your eyes, (Taxman!)
    ‘Cause I’m the Taxman,
    Yeah, I’m the Taxman.
    And you’re working for no-one but me,

  • Jeremy

    Joe, $1m is waaaay too low. It’s a serious pain in the tail to manage sales taxes for an online retailer and can take significant resource investments. The margin for most online retailers is razor thin due to high competition – 10% or lower usually. Let’s be generous though and say 25%. That leaves you with $250k. Advertising, operational costs, wages…yeah, a $1m/year operation is teetering on the edge of unprofitable as its manpower requirements are almost too high to be supported by its income.

    States providing software to help manage isn’t particularly helpful either. That’s a Frankenstein’s monster if I’ve ever heard of one. 50 states, 50 pieces of software, 50 different ways of getting at the database and thousands of state/local tax codes/considerations that have to be properly calculated. Sure, someone will create a piece of software that can do it all, but that won’t be cheap and I can guarantee it’ll be an ongoing expense as local tax code is always changing.

  • JoeyS

    This also makes it difficult for tax exempt nonprofits because with this tax in order to make any purchases they have to go through a process that for some companies takes days, just to clear and verify their nonprofit status. This will make nonprofits rely more heavily on single large retailers and not give as much business to smaller companies.

  • Kevin Ford

    The impact on small online businesses is one issue. Another that I have not heard raised is this: When a business that has a physical presence in a state collects sales tax, that business also receives the benefits of the government those taxes pay for, while an out-of-state business does not. Will that state give some of the money for educating the children of the employees? Send law enforcement to protect it? Firemen to put out its fires?

    My state sits next to one that doesn’t have a sales tax. Many residents of my state will shop there to enjoy the benefit of that price difference–and my state came backwith what must be the only law ignored more than the speed limit. It requires all residents to declare the goods they have purchased without a sales tax and then pay a “use tax” on them. It tried to force merchants in the neighboring state to report all purchases made so “use tax” evaders (which is everyone, including the legislators who passed the law) could be tracked down. The neighboring state gave a loud raspberry in response.

  • Joe Canner

    Kevin #12: That is an interesting point. Perhaps states should tax sales based solely on where the product was produced and/or shipped from. This would make states compete for online retailers based on tax rates. There should probably also be a tax on the shipping, since the shipper does, in fact, use infrastructure in the area where the buyer lives.

    Of course all this assumes that there is a one-to-one correspondence between taxes and use of infrastructure. For the most part states just try to balance budgets on a grand scale, not between producers and consumers. For example, in my state a recently approved sales tax on gas (to be used for transportation projects) will be reduced if the state gets more sales tax revenue from online purchases.

  • JoeyS

    Kevin #12 I think the issue is not about businesses paying taxes but about citizens. When I purchase something at a physical store I am paying the taxes on the item.

  • Marshall

    1. Somebody will put together a summary of the various state requirements, now that there is a use for it. It will get built in to Microsoft Money and all similar packages. PayPal will manage making payments. It will not be a problem.

    2. The main good thing is that it keeps states from competing against each other for lenient tax rules, a race to the bottom.

    3. Local control is better than national control. Villages are more moral than nations.

    I sympathize with the sentiment that if Congress is willing to pass it, We the People probably don’t want it, but hey, watchagonnadoo.

  • Larry Barber

    Wouldn’t it be better to just junk the sales tax for everybody, given that it’s a nasty, regressive tax that hits the poor harder than the rich?

  • Andrew

    Whatever harm it would do to relatively small retailers (it only applies to $1 million in annual sales or more businesses) is IMO more than outweighed by the needed state income. So much shopping is online now, and states have been gutting services like mental health, special education, and disability assistance for years.

    Now, if one wants to have a debate about sales tax vs other, more stable and progressive forms of taxation (property and income) than that debate should be had.
    High sales taxes are generally an awful idea as they repress demand in an economy which lives and dies on consumer spending. The ‘fair tax’ libertarians have their heads in the economic clouds.

  • Diane

    # 15 Marshall,

    I would argue that villages are NOT more moral than nations. Villages lynch, villages practice nepotism and cronyism, villages label and judge, hurt and exclude. We need strong nations to combat the cruelties of petty tyrants.

  • Dave

    “In any case, this seems like a great opportunity for enterprising start-ups to serve as clearinghouses for sales tax payments”

    This is the broken window fallacy. It’s the same fallacious argument that says war is good for the economy. Destroying resources (or in the tax case, forcing them to be given to a “clearinghouse”) always results in a net loss of capital. And therefore higher prices or reduced goods and services. Usually a mix of both over time, as the reduced capital makes its way back up the chain of higher order goods/services.

  • MatthewS

    The Internet was made possible by being a free-flowing pipe that allowed explosions of creativity and innovation. Once politicians start taxing it, a) they forever kill something that was vital to the soul of the thing, and b) they never know how to back up and charge less, only more. Anyone who has ever run a small business knows what it’s like to deal with governments fees and regulations. Politicians have their place but to a creative piece of technology like the web, as they do to small businesses, they bring death, not life.

  • @Diane #18:

    Nations carry out genocide, make dissidents disappear in the middle of the night, set up rape camps, pursue forced abortion policies, bankroll terrorists, torture political prisoners and enemy combatants, order assassinations, wage aggressive wars, and round up women and children to murder them in ditches.

    And not just “petty tyrants.” Strong nations.

  • Dave

    So, because brick and mortar establishments can’t innovate and compete in a changed marketplace, and state governments can’t control spending, it is OK to effectively levy new taxes?

    How about a real solution where there is no sales tax collected at all?

    I know a lot of people on here have pacifist tendencies, so I wonder how you reconcile tax levying and collection with its necessary implication of the use of violence in order to ensure taxes are payed?

  • This isn’t imposing a new tax; this is curtailing our ability to ignore the existing one. Government does stuff like that all the time.

  • sharkey

    In general, all tax is stealing. At least consumption taxes such as this leave some choice in the hands of the consumer, but how we can say that ANY tax is a ‘good tax’ is beyond me. Pouring more money into a corrupt government that misspends, misappropriates our money is one of the worst possible destinations for money. The government will simply use this new tax to buy more guns, build more prisons, send more armies, abort more babies, and usurp more power.
    There is no such thing as a good tax.