Are State Sales Taxes Obsolete in an Internet Economy?

The existing moratorium on new taxes on Internet transactions expires October 21, and Congress is considering several ways to deal with state and local sales taxes.  Governors from 44 states recently urged Congress to end the moratorium so that states and localities may tax remote Internet sales.

While the debate about extending the moratorium has recognized that sales and use taxes are burdensome and discriminatory, the arguments have generally ignored that such taxes are obsolete in our current economy.

The congressional debate has focused on whether to extend the present moratorium on new taxes targeting Internet interstate sales versus developing a “uniform” and “simplified” system under which the 7,600 states, counties and cities in America may make sellers collect sales taxes or buyers pay use taxes on remote purchases.

Tax simplification schemes almost always make tax matters more complex and burdensome, and there is no way 45 states (never mind 7,600 taxing jurisdictions) will be able to develop a tax scheme that does not add burdens to interstate commerce.

Pending legislation promotes centralized systems for states and localities to collect sales taxes on interstate commerce.  Proponents say that states need revenues from sales taxes, and a ban on Internet sales taxes would discriminate against purely local merchants.  Both premises are flawed. 

Sales and use taxes are not necessary, as evidenced by the fact that five states and many localities do not have them.  State spending last year increased twice as fast as increases in state revenues, and state tax revenues increased over 45 percent between 1992 and 1998.  But state and local officials have not been accountable to citizens about such increases.

In the business world, executives would not be allowed to let costs of doing business grow over 40 percent over several years, as is the case with various state governments, without justifying such increases.  But politicians generally recoil at suggestions that they cut spending.

Recent tax revolts in New Hampshire and North Carolina show that informed citizens are furious about proposed tax increases.  More public scrutiny of government spending, which is the real problem, is needed to reduce taxes.  Eliminating just one potential source of revenue would focus more attention on how states spend taxpayer money, and some waste will undoubtedly be exposed. 

Sales taxes discriminate against local merchants, but taxing sales on the Internet is not the solution.  Sales taxes were adopted during the Depression so local merchants would become disguised tax collectors for the state.  Given the growth of interstate commerce since then, that system has grown obsolete.

The wrong created by taxing local sales is not cured by burdening interstate commerce with centralized, uniform taxes based on arbitrary standards of “nexus” and “taxable presence.”   Any such system would add to the burden of small businesses that sell products over the Internet.

Add to these considerations the fact that any sales and use tax system practically encourages tax avoidance.  How many people actually pay use taxes?  Also, sales taxes are deceptive, as opposed to other forms of taxes which taxpayers calculate how much they pay.  How many people actually know how much they pay in sales taxes each year?

The real solution -- which a permanent moratorium on Internet taxes would encourage -- is for states and localities to stop hiding behind merchants, and abolish sales taxes for all. That will force use of modernized revenue sources and streamline spending.  States that refuse to compete in the new economy and continue with antiquated tax systems will suffer.  But Congress should not reward states’ shortsightedness and a lack of political will by allowing up to 7,600 jurisdictions make businesses file even more complex sales tax forms.

Richard A. Viguerie is a direct marketing businessman and political strategist.  Mark J. Fitzgibbons is a constitutional and direct marketing lawyer.