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Internet Sales Tax Moratorium Prevails, At Least For Now
Dec 1, 2001) President Bush on Wednesday signed into law a 2-year moratorium blocking any new taxes on e-commerce, but revenue-hungry states are working hard to come up with a scheme to impose a simplified national sales tax on interstate commerce. For the immediate future, we’re off the hook, but Internet taxation is a bad idea on principle, and would cost you dearly if ever passed.

On Wednesday, November 28th, President George Bush signed into law an extension of the ban on taxing of e-commerce by states, putting off this issue at least until November 1, 2003.

On the occasion of the bill’s signing, Bush said, “Extending the moratorium is particularly important during this crucial holiday shopping season. The bill will protect American consumers from an unwanted tax surprise when they purchase gifts online for friends and family."

This signing is certainly a relief to us at Under a 1992 Supreme Court decision, states cannot require merchants to collect sales taxes unless that merchant has a significant physical presence in the buyer's state. And because our corporation has no physical presence, or nexus, in any state that taxes coins and bullion (Arizona taxes neither coins nor bullion), all our customers in the 50 states enjoy sales-tax-free status when buying from us.

But states and brick-and-mortar retailers have argued that allowing sales over the Internet to transpire without any sales tax paid to either the state of origin or destination unfairly deprives the states of revenue and puts local retailers at a disadvantage.

For old-time retailers, who have suffered from the price competition that the Internet brings, imposing a sales tax on interstate sales would supposedly have the effect of “leveling the playing field.” Buyers of goods from out-of-state merchants would pay sales tax to the state they live in, making the hometown merchant seem more competitive. Sounds fair to all, doesn't it?

In fact, a universal sales tax on interstate commerce is fundamentally unfair. Such alleged “fairness” ignores the fact that Internet firms do not enjoy any benefit from paying taxes to states in which they don’t have a physical presence. In contrast, the brick-and-mortar merchant enjoys the roads, police, and a host of other services provided partially by the sales tax paid in that state.

But why should a merchant in, say, Arizona, collect a tax for the state of Illinois, and get nothing for it?

Rightfully, that merchant shouldn’t have to fill some other state’s general coffers. That’s why the Supreme Court has ruled that interstate commerce is exempt from local and state tax levies.

But there will be future efforts to tax interstate commerce. Senators Byron Dorgan (D-North Dakota) and Mike Enzi (R-Wyoming) unsuccessfully fought to write an exclusion into this bill that would have allowed consideration of taxing all sales by Internet, mail, or telephone, as soon as the states could agree to a simplified way to impose and collect the tax. You can be sure they’ll be back to try again, because there’s a lot of money involved, and the states would like to get their hands on it.

The red herring of this issue has been the argument about how to collect taxes across state lines.

Logistically, the obstacle to efficient tax collection on interstate sales is the crazy-quilt of 7,600 different combinations of state, county, and municipal sales tax currently in effect in various part of the US. This has led to the practical argument: how is a merchant to keep track of all the different tax rates around the country, and which government entity would be owed what on a particular sale if interstate sales are taxed? Of course, computing power being cheap and ubiquitous, this is no longer a practical problem at all. And in the name of tax “fairness,” some in Washington DC and statehouses around the country are working on a simplified plan and software that a merchant would use to track tax obligations by zip-code, thus making interstate taxation possible.

So as a practical matter, interstate taxation is possible. But, like human cloning, just because it’s possible doesn’t mean it’s right.

Focusing the debate on the practicalities ignores the simple unfairness of interstate taxation. Few have stood up to defend the basic principles (for instance, taxation without representation or benefit) which argue against the taxation of interstate commerce. Interstate commerce is older than the first Sears catalog of the 1880’s, and the fundamental principles against states taxing national commerce haven't changed one bit.

If the past two years (call it the post-Internet Panic era) have taught us anything, it is that the Internet is not some radical new venue that changes everything. As a business aid, the Internet is simply a tool, like a catalog or a toll-free phone number. The Internet hasn’t changed interstate commerce in any fundamental or qualitative way.

But the Internet has certainly allowed businesses like ours and thousands of others to make national commerce more cost-efficient for consumers in this country. And there's bound to be resentment by old-line retailers and states' treasurers, who are now in cahoots attempting to tax the business you do with companies in other states.

So beware any new legislation in Congress with titles like “The National Tax Fairness Act” or “The Main Street Store Equity Act,” or some such nonsense. They will simply be an attempt by governments to tax what hasn’t been taxed for over 200 years, and provide nothing in return.


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