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Friday, August 12, 2011

Hiking Online Sales Taxes

Too many politicians seem to just love hitting businesses and consumers with higher taxes. Their attention and concerns are focused on finding ways to fuel ever-increasing government spending, rather than on how to get the economy moving again.

That was glaringly evident late last month with a group of lawmakers introducing legislation that would set federal rules to allow for the imposition of new sales taxes on online retailers and consumers. U.S. Senator Dick Durbin (D-IL), and U.S. Representatives John Conyers (D-MI) and Peter Welch (D-VT), along with Senators Tim Johnson (D-SD) and Jack Reed (D- RI), and Representative Heath Shuler (D-NC), want to allow states to force out-of-state online retailers to collect state and local sales tax levies on purchases made by in-state consumers.

Senator Durbin said, "In 2012, states across the country, including Illinois, are expected to lose as much as $24 billion in uncollected state and local taxes on Internet and catalogue sales. From 2005 to 2010 the state of Illinois estimated it lost $153 million each year." Senator Johnson chimed in: "The Main Street Fairness Act will help support businesses in our state and also bring in $30 to $40 million in lost sales tax revenue at a time when important programs are being cut left and right."

Of course, a government cannot lose revenue that it never had in the first place. But the assumption behind this effort to raise taxes is that government has a fundamental first claim to grab a portion of revenue from private-sector commerce - even allowing one state to force businesses in other states to collect their taxes.

Currently, under the U.S. Supreme Court's Quill decision, states and localities cannot force businesses to collect sales taxes if the firms do not have a nexus, i.e., a physical presence, within that state or locality. And that makes sense, given that an out-of-state business has no impact on and derives no benefits from the services provided by those states and localities.

For good measure, the added costs, particularly for smaller firms, of collecting sales taxes for different states and localities represent an outrageous additional burden.

But what about what was reported by the Northwest Herald? "Durbin said there would be an exemption for small Internet businesses, but the definition of small would need to be determined." That's vague, to say the least, and no matter how it might be set eventually, it would not change the bottom-line impact for businesses and the economy.

Make no mistake, small businesses, consumers and the economy would be negatively affected by this massive expansion of sales taxes. Durbin claimed, "It does not create a new tax anywhere; it just collects existing taxes." But that is absurd. Current law does not allow states and localities to impose sales taxes on out-of-state firms, and this measure would change the law to allow for expanding the reach of these taxes. Hence, it would be a massive tax increase.

Finally, to claim that this would aid local businesses by making them more competitive with out-of-state online retailers is disingenuous. First, in-state firms obviously derive benefits from state and local government services. Second, the line between brick-and-mortar businesses and online businesses is increasingly blurred, as longtime, established brick-and-mortar enterprises set up shop online and expand their markets accordingly. Third, no businesses will benefit from the hit that the economy takes whenever sizeable tax increases are imposed, and this, again, is nothing more than a big tax increase.

The rhetoric about streamlining and simplifying sales taxes, and aiding Main Street retailers, can be quite alluring. But it adds up to nothing more than politicians trying to dress up a huge tax increase in nice political rhetoric.


Raymond J. Keating serves as chief economist for the Small Business & Entrepreneurship Council.

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