Harry Reid’s Tax-Raising Ploy Is a Political Bamboozle

OAKLAND, Calif.—U.S. internet commerce has grown dramatically over the past decade, from about $93 billion in 2003 to some $322 billion in 2013.

Several factors have driven this growth: convenience, access to products that aren’t always available locally and, frankly, the desire to save money, since online purchases from sellers in other states generally are sales-tax free.

This last item rankles many state officials, who see a potential bonanza—perhaps as much as $23 billion per year—if internet purchases could be added to the sales-tax base. That means a lot more money for state governments to spend.

The inability of one state to collect sales taxes on purchases from retailers located in another state dates to a 1992 U.S. Supreme Court decision involving Quill Corp., a mail-order seller of office supplies.

The justices ruled that Quill and other retailers are not required to collect sales taxes on orders delivered to out-of-state customers unless the distant seller has a “physical presence”—a distribution terminal, warehouse, or brick-and-mortar store—in the customer’s home state.

“Clicks” such as Quill have enjoyed favorable tax treatment not granted to “bricks” ever since.

Six years later in 1998, Congress enacted a three-year moratorium on internet taxes, which it has renewed four times since.

That moratorium will expire on December 11 unless it is extended again or is made perpetual, as the Permanent Internet Tax Freedom Act, passed by the House of Representatives in July would do.

Democratic Senate Majority Leader Harry Reid of Nevada wants to move in the opposite direction, and has promised to push for Senate approval of the so-called Marketplace Fairness Act (MFA) during Congress’s upcoming “lame duck” session.

The “fairness” in the MFA’s Orwellian title refers to internet sales tax proponents’ belief that “e-tailers” have a competitive advantage over traditional retailers, who are required to collect sales taxes from all of their customers, including out-of-staters who patronize their stores.

Forty-five states now impose sales taxes. Their rates vary widely, ranging from a high of 7.5 percent in California to a low of 2.9 percent in Colorado.

Moreover, some states exempt certain products from sales taxes—typically food and clothing—or tax these items at lower rates. These differences would require online sellers to compute the rate applicable to nearly every shipment.

While supporters of internet sales taxes make good rhetorical arguments, their arguments are full of holes.

First, the retail playing field in not as out of whack as they would have us believe.

Brick-and-mortar stores, for example, do not add shipping and handling charges to their prices, as many online retailers do.

Amazon cannot deliver a cappuccino with your book order. And online sellers of shoes and clothing cannot offer customers opportunities to feel and touch their products, try them on for size or see their colors in the light of day.

Instead of bemoaning unfairness and lobbying for protection, local retailers can offset their sales tax disadvantages in many ways.

Second, state lawmakers do not need another $23 billion in sales tax revenue to fatten government coffers. Indeed, if internet commerce continues to grow as expected, this $23 billion is just a down payment.

More important, like cross-border shopping in the physical world, the existing tax exclusion for internet sales applies a brake on sales-tax rates.

Eliminate the exclusion and you give state lawmakers a green light to increase these rates, making everyone poorer and transferring more money from the private sector to the already bloated and inefficient public sector.

Lifting the internet sales tax moratorium is a recipe for bigger, more intrusive state governments. Senator Reid should junk this bad idea and reconsider his lame-duck agenda.