"Internet Sales Tax" is Bad Economics, Likely Illegal

States try to grab money from sales - and non-sales - in other states. It's bad economics and probably illegal. Photo: Tim Kern

INDIANAPOLIS, March 14, 2012—The latest grab by tax-addicted state governments is heading for your wallet. Today, states have their sales tax collected by private businesses, when the transaction takes place in their state. Today, out-of-state purchasers are generally not charged sales tax. The new taxes are being sold to us as “fairness to our local businesses.” The reasoning is that local stores are particularly hurt by having to charge local customers tax, when these same local customers can often buy tax-free from out of state stores.

Even though shipping and handling charges for many items cost more than the local sales taxes, and shipping takes time that is saved by a trip to a local store, merchants are being brainwashed by their legislatures to think they are being hurt by out-of-state sellers, even as the legislators are planning to use those very merchants to send more money to the capital.

States want to set up a collusive trust, wherein every state agrees to charge tax on every sale, and turn the money in to the local state government. (This avoids forcing all sellers to keep up with every other state’s sales tax rates.) With the extra money rolling into the capital, legislatures will enjoy a new stream of money.

There are several problems with this scheme.

First, it will hurt all consumers. Taxes add costs to the things we buy, leaving less money available to buy… stuff.

Second, it forces out-of-state consumers for pay for out-of-state programs. What citizen of Indiana, say, wants to pay for Illinois kids to go to school, when the Indiana schools need the money just as much?

Third, it gives incentives to legislatures to continue raising sales tax rates. After all, other states’ citizens will be paying the bills, and they have nothing to say about it! And what Indiana resident wants to pay Illinois tax rates? It’s, you knowtaxation without representation.

What’s puzzling is that anyone believes this will be a good thing.

Merchants think they’ll retain more local customers, if the no-tax advantage is removed from interstate internet sales. That won’t happen: local customers, faced with unchanged incomes and higher taxes, will simply buy less stuff.

States won’t be collecting as much from non-citizens as they are already planning on spending. Raising prices on out-of-staters (particularly in high-tax states) will drive sales elsewhere, and will (for the same reason as above) reduce the overall level of sales activity.

The nightmare of collecting and documenting sales on a two-tier (or more-tier) system will be costly and confusing. Though state governments are no doubt relishing the possibility of fining their non-complying merchants every time they make a mistake, the merchants won’t enjoy it; and when the merchants pay extra for the bookkeeping and training necessary to avoid the fines, a lot of their enthusiasm will dry right up.

Plus, it’s not a “sales tax.”

A sale takes place when and where the exchange takes place. The exchange can take place in a store or maybe in a warehouse when an item is paid for and consigned to the buyer’s shipping agent, or when you pay for a COD package on your doorstep. In every case, a “sale” takes place when control of the item passes to the buyer.

In the store, this is obvious. With a COD shipment, control passes when the shipper gets paidon your doorstep. And when a sale is made over the internet, control passes when the package is turned over to the buyer’s shipper of choice. If a state can collect a sales tax, it is at that point.

Illinois is going one step crazier.

Illinois is now proposing to tax its own residents when they buy from sellers who are out of state. This is a double-cross of the Constitution: stepping across state lines to grab cash from a non-Illinois transaction.

What Illinois is doing here is placing a tax on its own residents’ abilities to send their own money out of state. That is not a sales tax; that is imprisonment.


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Tim Kern

Tim Kern taught economics for fifteen years, and discovered that understanding life is easy; it’s recognizing reality that takes practice. He holds a music degree, and later earned an MBA in finance from Northwestern University. He has lived across the US, and now makes his home in Anderson, Indiana.

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