The Case for a National Internet Sales Tax

States are aggressively implementing new tax policies aimed at generating revenue by taxing online commerce. In California, for example, all online purchases are subject to either California Sales Tax (for in State purchases) or a “use” tax (for out of State purchases). If you are from the State of California and you made out of State online purchases, in which you were not charged California State Sales Tax, you are subject to a “use” tax, to “make up” for the revenue the State of California would have received had you made the purchase in State. In fact, there is a line item for it on the California State Tax Return. All across the United States, individual States are levying new taxes and fighting for their piece of the pie.

The problem is that when you buy or sell a product, it is not clear what tax laws apply, if any. In particular, this is a problem for small business. Imagine the following scenario. A product is made in New York, stored in a warehouse in Kansas, sold by a person in California, purchased as a gift from someone living in Texas, for someone living in Arizona. What are the tax laws in each of these States? Do they apply? And if so, how do they apply? It is not hard to image that the tax on such an item could be up to 40%, depending, of course, upon who you ask. In a similar manner, what if someone is from New York, but is on vacation in Florida, and purchases an item online from a company in Oregon (where there is no sales tax), and has it shipped to a friends house in Georgia, where they can pick it up on the way home? Where did the transaction really occur?

. . . This line of reasoning is profitless. Intelligent law can no longer be based upon geographical location.

Current tax laws inhibit small business and engenders disrespect for the law. For small business owners, it difficult for those who would like to follow the law to do so. And for online consumers, do you really expect us to know where an item came from and if we paid sales tax? It is not surprising that almost no one in California paid “use” tax on out of state, online purchases. People refused. Not only is the use tax unenforceable, it is perceived as ridiculous. “Since you are not spending your money in State, we are loosing revenue, and would like you to make it up to us.”

In the end, we have fifty States fighting for their piece of the pie, and you are stuck in the middle. What we need to put an end to all this nonsense is a flat internet sales tax that applies to all online transactions and is fairly divided between the fifty States. It is the Federal government’s job to regulate Interstate Commerce, and now it is time to ask the Federal government to put an end to all the confusion.

The Case Against an National Online Tax

We are taxed for everything we do, sales tax, income tax, property tax, inheritance tax, business income, taxes on gas, cigarettes and alcohol, cell phones and cable, luxury items, overweight cars, sleeping in a hotel, and the list goes on. In fact, the government taxes your paycheck twice, but most of us don’t know it.

It is important to remember, however, that the purpose of a new tax is not always revenue. Parking tickets, for the most part, do not create revenue – a glorious tribute to the inefficiency of the government – but simply keep people from parking where they are not wanted. Property taxes are often used divest large land owners of their land. And tariffs may be used to help regulate the balance of trade.

How much do we pay in taxes? It is almost impossible to tell. From looking at revenues at the local, State, and Federal levels, I would guess that taxes are probably around 50% of the GDP, that is around 50 cents on the dollar. But it is hard to tell because of the way the accounting is done – special funds, interfund transfers, and enterprise funds – so you would have to ask an expert.

Think of it this way, if your income tax is 32% and you pay a 7.75% sales tax, then you are already paying 40 cents on the dollar. If you smoke, drink, like to stay in motels, or drive a lot, this number is going to go up a bit, never mind owning property. If you wanted to buy a modest house in Santa Barbara, for instance, you would pay $13,000 a year of property tax and almost $400,000 over a 30 year period. Ouch! And when you die, your assets are going to be divided between your family and the Federal government. When all is said and done, if you are not paying 50 cents on the dollar, I would be surprised.

And finally, with all the red tape, we are forced to hire lawyers and tax accountants, etc., and in a sense, this is a tax, too. And remember that Corporations are required to do a lot of the governments dirty work for them, payroll deductions, etc. I would love to see a study that looked at the cost of implementing government regulations and its impact on the bottom line, and on your paycheck.

Thus, if there was any question whether or not we live in a welfare state, I think that this clears up the issue. From a tax perspective, we live in a welfare state, but from a consumer’s perspective we do not. But, what does the government actually spend our taxes on? The first thing to remember that even in a good charity, 80% of the money goes to overhead, that is, the cost of providing the service. You see the same sort of thing in city government. You would really think that parking tickets would be a good revenue source for cities, but they are not.

A substantial percentage of the budget goes to the military, maybe around 10%. (Again, the accounting makes it almost impossible to be sure.) The rest goes for social security, medical care, education, social programs – probably in that order. In addition, a small percentage goes for public safety, capital developments, such as airports and roads, and maintenance. We pay a lot of taxes, but we don’t seem to get much for it.

In order to pay for new programs, without canceling old ones (and no one wants to see their program cut), it is necessary to raise taxes. And the government does not really care about what is “just” or “fair,” it is simply looking for new ways to take your money – something I learned while working in the City Administrator’s Office. So when the government asks for permission to raise your taxes, you would be wise to say “no.”

The argument against a National Internet Sales Tax is, thus, in part, an argument against new taxes. The government should be able to make do with 50% of your income. Raising taxes will not enable the government to offer exciting new programs or to end poverty, but it will simply mean that you have less money.

In addition, if the government performed important role helping to regulate the internet, it would be easy to justify taxation. But, if the tax is merely for the purpose of raising revenue for other programs, we may want to think about the potential cost. How will this affect the economy? How will it affect business? How will it affect the individual? And if the internet is the land of unlimited resources, free trade, and goodwill (or so I am told), do we really want to pollute it with real-world encumberments and limitations? If the money is simply going to go to some bureaucrat in a cubicle or pork barrel project, the answer is no.

Finally, we may ask whether the Federal Government be can trusted to implement a National Internet Sales Tax? Is it really reasonable to think that Federal Government is capable of collecting taxes, on the behalf of States, and distributing it fairly, without spending it first? History suggests that the Federal Government will raid State funds, leading to short falls in State and local government, affecting programs such as education and health care. In addition, history suggests that the distribution of tax revenue between States may be less than equitable. Thus, the implementation of a National Internet Sales Tax may not help relieve fiscal shortfalls, it may actually create them.

In conclusion, there is a strong case that may be made against the establishment of a National Internet Sales Tax. In short, a National Internet Sales Tax comes at to high of a price and may create more problems than it solves. Nevertheless, a National Internet Sales Tax may be better than some of the alternatives.

Conclusion: The Need for National Internet Sales Tax

The government will collect revenue to support various government programs, and it will do so by all available means. It is not a question of if, it is a question of how? Once we realize that it is not a question of if, but how, we may ask, how do we make it as painless as possible?

What we need is a straight forward, common sense approach, that covers everyone: a national policy, not a set of separate rules for every possible permutation. Because States are unlikely to agree on a single coherent policy, and because Interstate Trade falls under the jurisdiction of the Federal government, a National Internet Sales Tax is the only sensible solution. It will be important, however, to implement the policy correctly. In particular, it will be necessary to prevent the Federal government from raiding funds; and it will be necessary to establish strict rules for the fair distribution of Internet Sales Tax Revenues. This establishment of a National Internet Sales Tax, however, should be seen as just one part of a comprehensive Federal Internet E-Commerce Policy, which regulates trade, promotes small business, protects individual property.

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