Prior to his employment at Amoco, Mr. Johnston served as an economist with the RAND Corporation, the Institute for Defense Analyses, and the Secretary's Office of the U.S. Treasury. He served on the U.S. delegation to the United Nations Conference on the Law of the Sea.
Mr. Johnston's current research has focused on electric utility deregulation in Illinois and other states; pollution trading under the climate change treaty, Clean Air Act, and the RECLAIM system for the South Coast Air District; and a general theory of regulation, published in the Cato Institute's Regulation magazine.
Latest posts by Jim Johnston (see all)
- Price Controls, Whether For Labor Or Housing, Don’t Work - July 9, 2014
- Adding Economics to the Immigration Debate - May 20, 2014
- Encrypt Everything! - February 3, 2014
I sent the letter below to the Wall Street Journal in response to an April 17 piece by economist Art Laffer. Though the editors did not print it, they did me one better: They used my arguments in their April 21 editorial “The Internet Sales Tax Rush.” Now to my letter:
After a long series of insightful articles about how low taxes promote economic growth, Art Laffer gets the internet tax wrong. [The Wall Street Journal, April 18, 2013]The nexus requirement for imposing a state sales tax is rooted in the notion that in-state retailers receive state services, while out-of-state retailers do not. There are exceptions that justify a “use” tax. If the product, like an automobile, is purchased in one state but consumed in another state where the product receives extensive state services, then the tax is appropriate. However, that rationale is seldom if ever offered for goods bought over the internet.The internet tax is supposedly justified because “showrooming” exists. It is claimed to be unfair because it allows a potential buyer to inspect the product in a brick-and-mortar shop before purchasing it on line at a lower price. What this argument leaves out, is that the internet typically offers evaluations from other buyers. The local retailer can use these evaluations to help the purchaser make a selection right in the shop. Thus, the internet is in effect subsidizing the local purchase with relevant information.If the local shop has an inventory of several brands, then the buyer can take immediate possession of the product. By contrast, the internet buyer must wait for the product to be delivered and is charged a shipping fee that can be as much as a sales tax. Thus, the local shop has another natural advantage.To burden internet sales with a needless tax will make a large portion of the retail market less efficient and may impair economic growth. I am surprised that Art Laffer would support such a tax.
The Internet Sales Tax Rush
Harry Reid and Wal-Mart hope nobody will notice their online revenue raid.
Every time Congress has taken a serious look at proposals to boost Internet sales taxes, it has rejected them. That’s probably why pro-tax Senators are trying to rush through an online tax hike with as little consideration as possible.
As early as Monday, the Senate will vote on a bill that was introduced only last Tuesday. The text of this legislation, which would fundamentally change interstate commerce, only became available on the Library of Congress website over the weekend. And you thought ObamaCare was jammed through Nancy Pelosi’s Democratic House in a hurry.
For Senators curious about what they’re voting on, it is the same flawed proposal that Mike Enzi (R., Wyo.) introduced in February. It has been repackaged to qualify for a Senate rule that allows Majority Leader Harry Reid to bypass committee debate and bring it straight to the floor.
Mr. Enzi’s Marketplace Fairness Act discriminates against Internet-based businesses by imposing burdens that it does not apply to brick-and-mortar companies. For the first time, online merchants would be forced to collect sales taxes for all of America’s estimated 9,600 state and local taxing authorities.
New Hampshire, for example, has no sales tax, but a Granite State Web merchant would be forced to collect and remit sales taxes to all the governments that do. Small online sellers will therefore have to comply with tax laws created by distant governments in which they have no representation, and in places where they consume no local services.
Meanwhile, New Hampshire’s brick-and-mortar retailers will bear no such burden. They will not be required to collect taxes on the many customers who drive across the Maine and Massachusetts borders to shop in New Hampshire. Bill sponsors say it would be too big a hassle to force traditional retailers to ask every walk-in customer where they live, but these Senators are happy to impose new obligations online.
The Enzi plan would require a centralized tax collector for each state or for a group of states that would gather both state and local levies from the online merchants. His office concedes that could still mean 27 or more different auditors of a Web-based business—which is better than 9,600 but hardly qualifies as simplicity.
The drivers of this rush to tax are Wal-Mart and other big retailers that can more easily absorb the costs of collection than can smaller competitors. Also supporting the bill is Internet giant Amazon, which coincidentally now sells its own tax compliance service to other merchants. Adding to the lobbying muscle are state and local governments. The politicians believe they’ll collect tens of billions of dollars in taxes that are already owed by shoppers on remote sales but rarely paid.
So big business and big government are uniting to pursue their mutual interest in sticking it to the little guy. Any Internet seller with more than $1 million in annual sales would be forced to serve all of the nation’s tax collectors. It’s true that many small brick-and-mortar retailers in states with sales taxes support the Enzi bill. They say they’re at a disadvantage as customers examine products in their showrooms and then go home to buy them tax-free. On the other hand, some customers use retail websites for research before buying at a local store.
But even if the goal is to “level the playing field” in favor of Main Street, it won’t happen. Mr. Enzi cannot possibly force all the world’s Internet businesses to collect local U.S. taxes. So instead of shifting sales from online to bricks-and-mortar, he might succeed in shifting them from U.S. online merchants to foreign ones.
This rush to tax is an attempt to overturn the Supreme Court’s 1992 decision in Quill v. North Dakota that forcing businesses to collect and remit taxes to jurisdictions where they have no physical presence was too big a burden. Though that ruling applied to catalogs in the pre-Internet age, it established an important principle of cross-state tax accountability.
Congress does have the power to write new rules for interstate commerce. But for years even politicians who wanted to force remote sellers to collect taxes conceded that it would only work if states and localities dramatically simplified their tax systems. That has never happened. So now the tax collectors promise that software will figure out how every item is taxed in every town in America.
Perhaps software will flawlessly determine, for example, what is classified as candy for tax purposes and what is considered food in each jurisdiction. But the legislation itself contemplates confusion, as it spells out when a merchant is liable for errors and when a software vendor takes the blame. The way governments work, they’ll penalize both merchants and the software vendors for mistakes.
Some of our conservative friends are backing this Internet tax raid as a way to raise revenue to avoid more state income-tax increases. More likely the new revenues will merely fund larger government. Republicans who are realists about government would be wiser to join Senators Ron Wyden (D., Ore.) and Kelly Ayotte (R., N.H.), who are leading the opposition.