Taxing e-commerce at the source is fairest solution

Guest Column: Ramesh Ponnuru
Danny Diaz, spokesman for the Alliance for Main Street Fairness, was recently in Tennessee for one of his daughter’s basketball games. “The strip malls are empty,” he said. More

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OPINION

Taxing e-commerce at the source is fairest solution

Guest Column: Ramesh Ponnuru
Posted 8/1/11

Danny Diaz, spokesman for the Alliance for Main Street Fairness, was recently in Tennessee for one of his daughter’s basketball games. “The strip malls are empty,” he said.

“There are for-lease signs everywhere. When do we get to the point where these retailers just close up shop? … It is critical that we let these small employers compete.”

What Diaz is hyperbolizing about is what he considers an unfair subsidy for companies such as Amazon.com Inc. that sell products over the Internet. Go to your local bookstore, if you can find one, and you’ll pay the local sales tax. Order a book online from an out-of-state vendor and you will owe your home state a sales tax on it, too – but nobody will collect it. The Supreme Court has ruled, most recently in 1992, that states cannot order out-of-state companies to collect these taxes.

This disparity is indeed unfair both to the mom-and-pop retailers that Amazon’s critics like to talk about and to the larger companies, such as Wal-Mart Stores Inc. and Target Corp., that provide much of those critics’ financial support. Worse, it distorts the economy, because it means that Internet-based companies do better for reasons unrelated to their ability to provide good products to consumers at low cost.

Although Amazon’s critics have identified a real problem, their solution is a mistake. They want an Amazon tax that replaces one type of unfairness with others, and imposes costs on the economy out of proportion with any revenue it might generate.

Over the past two years, state governments have considered instituting such a tax as a way to help them balance their budgets. Eight states have already done so.

These states tax Amazon, which is based in Seattle, and other Internet businesses when they have affiliates or distribution centers inside their borders. But whether states may use this maneuver is the subject of litigation that seems likely to last a long time, and Amazon has sometimes responded by cutting off its affiliates or threatening to move its distribution centers.

Nobody, by contrast, questions the legal power of Congress to allow the states to tax e-commerce. So Sens. Dick Durbin, D-Ill., and Mike Enzi, R-Wyo., plan to introduce legislation authorizing states to form a compact. Internet-based companies would have to collect taxes when selling to a customer in any of the states that belong to it. But this solution has serious downsides.

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