All's Not Fair in Internet Tax Wars

Those Buying Over the Web Shouldn't Pay For Unused Infrastructure

Tom W. Bell*

L.A. Daily Journal, February 1, 2001, at 6


When it comes to taxing the Internet, equal is not necessarily fair. It depends on the kind of equality at stake. Proponents of imposing new interstate taxes on Internet retail sales tout exactly the wrong kind of equality: results. Equality under the law, even when it generates unequal tax burdens, offers a fairer approach to Internet taxation.

Internet retailers enjoy no special exemption from across-the-board sales and use taxes. They live under same laws as their bricks-and-mortar competitors. Each type of retailer must collect taxes on behalf of states where its purchasers reside and where the retailer has a store, office or other substantial presence. But thanks to long-standing U.S. Supreme Court precedent, recently validated by the Tax Freedom Act, no retailer -- Internet, mail order or otherwise -- has to collect taxes for states where it lacks such a "tax nexus." Equal treatment here means fair treatment, leaving states unable to complain that Internet retailers enjoy a tax loophole.

Equal treatment turns into unfair treatment, however, when it demands the same price for different levels of service. It is not fair, for instance, to force first-class fares on economy-class passengers or to demand Ivy League tuition for a community college education. That same principle holds true for the pricing of government services.

The sales and use taxes imposed on retail transactions fund local government services such as fire and police protection. In principle, the same citizen-consumers who benefit from such services pay for them through those taxes. Retailers merely add the applicable tax to their prices, collect the money from consumers, and pass it on to the local government.

Now compare Alan and Beth. Alan drives on police-patrolled streets to a mall protected by the local fire department, buys a shirt and drives back home. Beth stays in the comfort and safety of her den and purchases a book online. Should Alan and Beth pay the same sales and use taxes? No. Alan places far greater demands on state and local government operations than Beth does.

True, Beth enjoys some police and fire protection even as she sits at her computer. But Alan consumes those same services once he brings his shirt home, in addition to the extra services he consumes during his real-space shopping trip. Fairness here calls not for equal taxation, therefore, but for equal treatment. No one should be forced to pay for services that go unwanted and unused.

Politicians who propose new interstate taxes on Internet retail sales thus seek the wrong sort of equality, the sort that would level not the playing field but the players. Internet consumers deserve better treatment. Because they use retail channels that impose fewer burdens on state and local government services than traditional retailers do, Internet consumers benefit their communities and our environment even as they benefit their own pocketbooks. Politicians should encourage that sort of shopping, not target it for special taxes. Neither should they try to implement such taxes by putting Internet retailers to work for states' revenue collection departments.

Principles of equality and fairness hardly explain the call to impose new interstate taxes on Internet retail sales. Fear and opportunism do, though. State politicians openly worry that the increasing popularity of Internet retailing will cut into the revenues generated by their sales and use taxes. It may turn out that online commerce generates enough overall economic growth and government cost savings to compensate for any lost tax revenues. Politicians who suspect as much probably worry, however, that this latest and greatest cash cow may escape them if they do not start taxing it soon. Some, sadly, seem just as willing to butcher Internet commerce as to milk it.

But regardless of whether the concerns of such politicians merit sympathy, their proposed solution, new interstate taxes on Internet retail sales, merits scorn. Businesses have discovered the dire costs of refusing to adapt to the Internet. Politicians who think they can box online commerce into outmoded tax schemes should prepare themselves for a similarly sharp lesson.

Rather than trying to tax the Internet, politicians should try using it. The same methods that allow Internet businesses to respond quickly and precisely to consumer demand might help state and local governments do a better job of repackaging or privatizing their services to better match the individual needs of their citizen-consumers. Rather than paying no taxes on purchases from out-of-state Internet retailers, or equal but unfair taxes on all Internet sales, we might end up paying unequal but fair prices for the services provided by local and state governments.

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*Tom W. Bell, a visiting professor at the University of San Diego School of Law and an associate professor at Chapman University School of Law, is an adjunct scholar of the Cato Institute.

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"All's Not Fair in Internet Tax Wars" Op-Ed - - v.2001.02.08