Taxing the Golden Goose

With state budgets still wracked by the Great Decline, Massachusetts lawmakers are now entertaining bricks & mortar (b&m) retailers’ demands to capture sales tax from Internet purchases.

Curio City already collects sales tax from Massholes; last year we fattened the state’s coffers by $106. The current proposal targets out-of-state behemoths like Amazon and Overstock by defining affiliates as being an in-state presence. (If you have an Amazon link on your website and you collect a commission when a buyer clicks through, you’re an affiliate.)

Theoretically, that means that the big online retailers would have to collect sales tax from Massholes. In reality, Amazon simply curtails its affiliate programs when states enact this boneheaded legislation. The orphaned affiliates have to cope with the lost revenue. If it was core to their business strategy, some affiliates move to a friendlier state. Either way, the state loses revenue from the businesses that shrink or leave, and does not collect one dime of additional sales tax. Everybody loses except the politicians who score points with the local b&m retail industry.

It would actually benefit Curio City to a tiny degree if the megasites really did start collecting sales tax in order to preserve their affiliate programs. But the odds of that happening are approximately zero.

Far more worrisome is a national effort to kill the goose that lays the golden egg. The Supreme Court’s ruling that states can’t tax sellers outside their borders was fine in 1992, when it only affected mail-order catalogs and home shopping channels. It remained fine when online retail was a curiosity. It’s less fine now that big money is at stake ($23 billion in uncaptured taxes by one estimate, but only $4 billion by another) while state budgets are in shambles. Internet sales won’t eclipse b&m for some years yet, but they’re growing much faster. The states want a piece of the action and b&m retailers (understandably) want to stave off their creeping obsolescence for as long as possible.

Some years ago a coalition of states banded together to work out a uniform sales tax collection policy administered by a central collection agent. Rather than face thousands of jurisdictions with varying rates and exemptions, retailers would simply track sales by state and send a lump sum to this agency. Presumably the simplified collection mechanism circumvents the Supremes’ chief objection and paves the way for an internet sales tax to be ruled constitutional. Once this structure is ironed out, the states will ask Congress to open the spigots of billions of new tax dollars. About half of the states are playing along with this, so it’s got to be taken seriously.

OK, so what? I’d just be collecting and remitting tax from consumers, not paying it myself. Americans’ overall tax bills are at a historic low and all levels of government are hemorrhaging money. All serious economists agree that taxes need to go up. Isn’t it better to enforce existing consumption taxes than to raise income taxes? Why should I help shoppers dodge taxes that they already owe?

First, business don’t exist to be tax collectors (or insurance providers either, for that matter, but that’s a whole different rant). As a Massachusetts-based business, I don’t have a problem with collecting tax from my fellow Massholes and turning it over to my own state’s government. Curio City indirectly benefits from state services. I do have a problem with being a tax collector for 49 other states. But that’s just a philosophical objection.

Second – and more practically – being tax exempt partially offsets the competitive disadvantage of shipping fees. I’m not Amazon. Businesses that ship fewer than 100,000 packages a year – nearly 100 times my size -- have to pay retail for postage. Shipping is my second-largest expense item (behind payroll), running 16% of gross sales. I obviously can’t just abolish shipping fees. Customers accept them because they’re saving time and money for gasoline, parking, and sales tax. But how many people are willing to pay both tax and shipping? Very few, if my small number of Masshole customers is an indicator. If all online retailers start charging sales tax, a lot of shoppers will only buy from the free freight megasites.

Third, I expect that the mechanics of compliance would be expensive and time-consuming. I’d need new versions of Sunshop and Quickbooks just for starters. One can only hope that very small companies like mine would remain exempt.