Recently, it was reported that Gov. Susana Martinez will oppose efforts to tax sales made over the Internet. This may sound like a straightforward case of “to tax or not to tax,” but it is not and New Jersey Gov. Chris Christie recently signed a deal with the online vendor Amazon to collect certain taxes and has endorsed federal legislation that would enable collection of taxes on sales made over the Internet.
The issue is complicated because states rely on vendors (private businesses) to collect taxes for them. That is easy when a business with one or more physical locations can charge one tax rate at each location. It is not as easy with 7,400 local and 45 state tax jurisdictions nationwide. That burden is why the Supreme Court has ruled that businesses lacking a physical presence in a given state should not be forced to collect taxes on sales made in that state. With the advent of the Internet, governments have been working hard to alter federal laws to capture that revenue stream. I wrote this policy paper back in 2000. It still provides a nice summary of the issues. Simply put, the issues are not whether Internet sales should or should not be taxed (they are), but whether small businesses should be burdened with the states’ responsibility for collecting taxes and whether a unified, federal system will hinder competition between the various states (it will).
An updated article explaining the unfairness of federal legislation under consideration on the topic of Internet sales taxation is also available from the Competitive Enterprise Institute. Kudos to Gov. Martinez for her stand for consumers and small businesses. Unfortunately, I’m skeptical that our current Senators in Washington will take such a firm stand.