Here in WSJ opinion pages, one argues that many of the tax avantages are trying to be taken exploited by the tax man
http://www.opinionjournal.com/weekend/hottopic/?id=110009429
uConsumers have spent more than $20 billion shopping online since Thanksgiving--a 25% increase over a year ago. The total for this holiday season could approach $25 billion. This tracks what is expected to be strong holiday-shopping growth across the country, even in brick-and-mortar stores (which used to be called just "stores"). Not everyone will benefit equally, though all signs are that this Christmas season will be economically healthy all around.
But even Christmas stories, from Dickens to Seuss, need a villain. We'd like to nominate your friendly neighborhood state governments, which for years now have been predicting dire declines in state finances because untaxed online shopping would erode the revenue-raising ability of sales taxes.
As usual, the political gloom proved to be overwrought. State tax revenues took a header in 2002 along with the rest of the economy, but they've been growing smartly ever since. The third quarter of this year saw state tax revenues up 4.6% over last year, and that was a deceleration from growth that has bumped along at close to 10% at times in recent years. State sales-tax receipts grew at 4% in the third quarter--and that was the slowest growth in three years. The biggest news about the sales-tax apocalypse is that it isn't happening.
But the strong trend lines for overall tax receipts and sales-tax revenue in particular haven't slowed the move among states to grab a piece of the online-sales pie. In the 14 years since the Supreme Court ruled that the myriad state and local taxes were too complex for mail-order retailers to be expected to master, there's been a movement to obviate that argument by "streamlining" the country's many sales-tax regimes.
Indiana, New Jersey, North Dakota, Oklahoma, Vermont, West Virginia and more than a dozen other states have been busy laying the groundwork for an Internet sales tax regime that will charge consumers based on where they live, not where they click to when shopping online. And the system is already up and partially running.
In Quill Corp. v. North Dakota in 1992, the Supreme Court ruled that forcing retailers to learn the ins and outs of every local sales tax was too burdensome. Instead, the Court found retailers can be forced to collect sales taxes only where they have a physical presence.
But never underestimate the determination of politicians to impose a new tax. The Supreme Court left open the possibility of dispensing with the brick and mortar test if complying with various sales taxes could be made dramatically easier. So six years ago the National Governor's Association, the National Conference of State Legislatures and other politicians seeking more of your money founded a new organization to oversee the mammoth effort of aligning sales taxes across state lines. And the group--the Streamlined Sales Tax Governing Board--has made a lot of headway.
The biggest hurdle was getting several states to agree on how to simplify their sales taxes. The Board cleared that five years ago by striking an agreement that settled the most contentious issues, such as how to determine which locale's sales tax applies to a particular online sale. Today the Board counts 21 states as "members" of the agreement.
Approximately 1,000 retailers are also now "voluntarily" collecting online sales taxes, regardless of whether they are required to under Quill. The reason? Congress hasn't clarified what constitutes a "physical presence" and the Board has exploited fears that states might sue for back taxes by offering an "amnesty" to companies that start collecting taxes now. The catch is that to be eligible retailers must collect taxes on sales to shoppers in every member state. Last year, voluntary tax collection topped $30 million, a fraction of what states hope to rake in eventually.
Consumers are also finding themselves paying more in other ways. Last month, West Virginia Governor Joe Manchin shelved a tax cut when faced with either running afoul of the Board's definition of candy or imposing different tax rates depending on whether a candy item contains flour. Vermont will repeal taxes on clothing next month, but impose new taxes on computer software and beer.
"Simplifying" taxes thus turns out be a complicated business. Or to put it another way, this political exercise is already reducing the tax competition among states that has been a rare incentive for keeping the tax burden low. We are heading, willy-nilly and without much debate, toward a de facto national sales-tax regime. North Dakota State Senator Dwight Cook, a Republican and president of the Streamlined Sales Tax Board, told us he expects six states to reform their sales taxes next year. "The next couple of months could tell quite a story," he says.
That they could, and not necessarily a happy one for taxpayers. One source of economic growth in the U.S. has been the explosion of online purchases and the access of many small retailers and artisans to a global audience. These businesses already pay local income and property taxes, and the smaller they are the larger the burden of having to collect sales levies. The "streamlined" sales tax won't look so attractive to them.
The larger issue, however, is the decline in tax competition among the 50 states. One reason New York City has felt compelled to exempt purchases of clothing items below $110 from its 8.375% sales tax is to prevent too many shoppers from heading to New Jersey or Connecticut. The lack of an income or sales tax in New Hampshire has also forced nearby states like Massachusetts and Rhode Island to cut their own levies lest they lose even more taxpayers to Nashua or Manchester. And in the European Union, Ireland and the Baltic states have used low corporate rates or flat taxes to attract capital, driving the high-tax French and Germans to demand "tax harmonization" from the bureaucrats in Brussels.
The same self-interested impulse is driving the American state politicians who are quietly building this uniform multi-state online sales tax. If that's their game, then the least they could do for beleaguered taxpayers is cut income taxes to offset their new online windfall. Some smart politicians should start to demand it.
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