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The case for taxing online commerce

This column originally ran in ComputorEdge on January 30, 2004
(Issue 2205, A Taxing Situation)

Will we be seeing more online sales taxes this year?

Given the state of California's budget mess, those of us in the Golden State ought to hope so. It's one of the few revenue streams not already tapped dry by the state government.

Until recently, the federal government prohibited state and local authorities from taxing sales made via the Internet. While those reins have been loosened, state governments have still been hesitant about taxing online purchases.

The argument has been that taxing online sales would stifle the growth of online commerce – that it would be a mistake to shackle this exciting new technology.

But online commerce grew tremendously this just-completed holiday season – the fifth or sixth year in a row that online purchases have jumped markedly over the previous year.

Online commerce would hardly seem to need the kind of protective measures we're giving it.

Besides, do not those businesses selling online still draw on the public resources that our tax dollars support? Does not need fire and police protection? Do their employees not use the toilet?

And so it seems unfair that doesn't have to charge its customers sales tax while the local Barnes & Noble or Borders outlet does.

The time when the Internet was in need of such federal intervention to protect it is long gone; the Web's incubation period is far behind us.

It is, in short, time to push the Internet out of the nest and let it fly on its own – and for it to start paying its fair share of supporting public institutions and infrastructure.

Hopefully, now that Congress has loosened the reins, the states will see the light of day and start assessing a fair and equitable sales tax from online merchants and their customers.

There are details to be ironed out, of course – the big one being jurisdiction. As in, if I'm in California and buy something off a Web site in Colorado, which state collects the sales tax?

As we've seen with states assessing professional athletes a pro-rated share of their income tax for games played in their borders, the states can be unscrupulous when it comes to taxes. (For instance, when the Colorado Rockies play the Padres in San Diego, the California government taxes each of the Rockies a percentage of their income based on how many games they play here. As to whether they must also pay income tax to Colorado on that portion of their income, that seems to vary state by state. All in all, it's a wonderful situation for tax attorneys and accountants with pro athletes for clients.)

But if I'm buying from a company based out of Colorado, it's Colorado that bears the preponderance of the infrastructure costs – and so it's Colorado that ought to get the sales tax.

The reality, though, is that California is likely to demand a share, too – or simply add on a second portion of sales tax.

That needs to be avoided – while online merchants shouldn't get a free ride on sales tax and the competitive advantage that brings over brick-and-mortar merchants, nor should online commerce be punished by letting the states double-dip.

So it may take Congress to set some limits on the states, to prevent the kind of ridiculous situation we have with professional athletes and state income taxes.

The whole tax issue is a big shell game, anyway. We want all the services that a large government provides, but don't want to pay for them. And so our elected officials, trying to keep us happy so we'll re-elect them, find all kinds of ways to tax us without our realizing it. Gas taxes, alcohol taxes, phone tax – and those are on top of the income and property taxes.

But as long as this cracked system is what we've got, it's hard to argue against taxing online purchases.