Should We Tax Internet Retail?

Lee Hachadoorian on Dec 7th 2013

Last weekend I saw an episode of The Good Wife (it’s a few weeks old, I’m a little behind) in which the governor-elect of Illinois decides to send a message to fictional tech giant ChumHum by publicly floating the possibility of collecting taxes on the sales of out-of-state, internet-based companies. Then at the beginning of this week the Supreme Court declined to hear Amazon’s appeal of New York State’s real-life law requiring just that. (ChumHum always struck me as a Google stand-in rather than an Amazon stand-in, but, whatever.) People tend to view Amazon as the evil giant in this case, with some commenting that “It’s about time” they started paying their fair share. But I think there’s a tendency to lump this in with more general concerns about corporate tax avoidance, and I want to suggest some reasons why the new regime is undesirable.

First, Amazon isn’t necessarily going to be the one paying the tax. Sales taxes tend to get split between the seller and the consumer, with consumers absorbing more of the tax on necessities (it’s difficult to stop buying food, or, for that matter cigarettes), and sellers absorbing more of the tax on luxuries. Now, Amazon is probably mostly selling things that fall more toward the luxury end of the spectrum, but some of the tax will be absorbed by consumers. Of course, the real point of the law is that requiring Amazon to collect sales taxes levels the playing field between out-of-state and in-state businesses, but some sales Amazon would have made won’t be substituted by an in-state purchase, because the consumer will decide that the after-tax price is too high. This represents a loss to Amazon, no gain to any in-state seller, and a loss to the consumer. Some consumers will still make purchases, so the state government will still collect new revenue.

Second, and more important, sales taxes are fairly regressive. Lower-income households spend a relatively greater proportion of their income than upper-income households, so if we consider the tax as a percentage of income, lower-income households are paying a higher percentage. New York tries to make the sales tax less regressive by exempting necessities like food, but it’s tax exemptions are notoriously bizarre. For example, nuts are not taxable, unless they are honey-roasted, in which case they become taxable again. Rather than extend a regressive tax to out-of-state purchases, New York could reduce the sales tax on in-state purchases. The lost revenue could be made up by increases in the income tax or (for localities like New York City that rely on a sales tax increment) the property tax. This would be a more progressive outcome, but of course it is much harder politically to raise taxes on in-state sources than to impose a tax that seems to fall on an out-of-state source. But since the sales tax reduction would increase in-state sales, in theory the lost revenue could be offset (this would need to be modelled) by increased revenue from business income taxes and from property taxes, even without an increase in those tax rates.

Third, the whole reason this is an issue is because it was relatively easy for consumers to avoid the sales tax by ordering from out of state. One could argue that governments should try to avoid taxes which are easily avoided. Out of the big three, sales taxes are most easily avoided, income taxes less so (there is some debate over the impact of tax-related migration, but one recent study flat out calls tax flight a “myth”, Gerard Depardieu’s move to Russia notwithstanding), and property taxes are least easy to avoid. In fact, the land portion of the property tax is completely unavoidable, while the capital (structure or building) portion may cause some capital flight if the tax is much higher than in competing jurisdictions. Because sales taxes are relatively easy to avoid, and because there are a large number of taxing jurisdictions that businesses have to keep track of, there have been some noises in Congress about standardizing sales tax rules across the states. This is a bad idea for reason number two, regressivity. Consumption taxes are pretty popular among conservatives as an alternative to the income taxes, I would argue specifically because consumption taxes are so regressive (but see Robert Frank’s discussion of a progressive consumption tax). My concern is that if we back ourselves into a national sales tax, it will gradually eat away at the income tax, leading to an overall more regressive tax system.

Finally, to the extent that this tax does fall on Amazon, we can ask what kinds of businesses we want to be taxing. The Mining, Quarrying, and Oil and Gas Extraction sector pays on average 6% of corporate income in taxes [gated link]. So if we were looking for new revenue…


Filed in Federalism,Public Finance | Comments Off on Should We Tax Internet Retail?

Skip to toolbar