^{Democracy & Technology Blog} Strengthen the Internet tax moratorium

Sen. Ron Wyden
The Permanent Internet Tax Freedom Act (S. 156) was introcuced by Senators Ron Wyden (D-OR), John McCain (R-AZ) and John Sununu (R-NH) to prohibit: (1) taxes on Internet access, (2) double taxation of a product or service bought over the Internet, and (3) discriminatory taxes that treat Internet purchases differently from other types of sales. The bill is a good start, but doesn’t go far enough. For one thing, it does nothing to reduce disciminatory taxation of telephone, cable and wirless services. Wyden cites these taxes as a justification for his legislation,

If you want to figure out how much discriminatory taxes could be, just look at your phone bill. Taxes and government fees already add as much as 20 percent in surcharges to consumer’s telephone bills.

Sen. John Sununu
The taxes don’t apply to “Internet access” (at least not until November, when the current moratorium expires), but that’s just one component of the online infrastructure.

… taxing consumers for accessing the Web discourages Internet use, reduces investment, stifles innovation, and limits the services available to consumers.

added Senator Sununu, who also revealed he is developing separate legislation to expand the Internet tax ban. S. 156 would allow state and local officials to continue trying to impose sales taxes on online transactions.

States participating in the Streamlined Sales Tax Project
Tax collectors from several states are trying to circumvent a Supreme Court ruling which prohibits states and localities from taxing catalog and online sales unless the vendor has a phyysical presence in the taxing jurisdiction. States participating in the Steamlined Sales Tax Project* are offering “amnesty” to online vendors who “voluntarily” collect sales taxes for the jurisdiction(s) where an online purchaser lives. The amnesty who hold the online vendor harmless for previously uncollected sales taxes.
State and local officials assume it’s just a metter of time before Congress or the Supreme Court authorize taxes on remote sales, and that their amnesty offer is meaningful. That may be wishful thinking. There have been several unsuccessful attempts in Congress to enable states and localities to tax remote sales. In 1992, the Supreme Court considered the issue and declined to settle it. The Court said it preferred that Congress resolve the issue:

… the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions.

Quill Corp. v. North Dakota, 504 U.S. 298 (1992), per Justice Stevens.
It isn’t clear that sales tax collections in the aggregate are in any danger of imploding. Although there are billions of dollars in online sales activity, the Wall Street Journal cites a Jupiter Research finding that online shopping, which currently accounts for less than 7% of total retail revenue, is “never likely to account for more than 15% of total sales because shoppers still enjoy touching and viewing merchandise.”
Taxing remote sales is justified in part as help for the beleaguered main street hardware store struggling to compete with Wal-Mart. But this argument is myopic. The Interent allows the hardware store to market itself globally, and exploit the same tax advantage its online competitors enjoy. If successful, it will hire additional workers and boost the local economy. Tax harmonization diminishes this possibility.
A Wall Street Journal editorial points out the Streamlined Sales Tax Project is “reducing the tax competition among states that has been a rare incentive for keeping the tax burden low. We are heading, willy-nilly and without much debate, toward a de facto national sales-tax regime.” That’s certainly true.
Additionally, as Gary Becker has observed, taxing Internet transactions would create opportunities for evasion, which would lead to regulation which would harm innovation,

Any significant sales tax on internet transactions would induce sellers and buyers to find ways to evade paying the tax. That includes setting up offices outside the United States, perhaps while shipping from places within the country, false invoicing, and still other methods from creative minds intent on evasion. All taxes induce avoidance and evasive actions, but internet transactions are particularly difficult to police, as seen, for example, from the proliferation of internet pornography. Hence attempts to collect taxes is likely to lead to substantial regulations that would slow down the so-far remarkable rate of innovation on the internet.

* The states are: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Utah, West Virginia and Wyoming.