Internet Tax Is Just Another Revenue Grabber

Arthur Laffer wrote a decent article recently in the WSJ regarding the merits of the internet sales tax being considered this week in Congress. He is correct when he asserts that “the principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation's fiscal problems”. However, from an accountant’s perspective, there are a few points that need clarification.

First, Laffer suggests that there is somehow a dearth of tax revenue from which states are suffering. He writes, “the exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes”. This is simply untrue. State legislatures have always operated without really counting on out-of-state retail sales tax or internet tax collection because of the overburdensome process. It’s not like there is a line item in state budgets that lists “uncollected internet/out-of-state tax” or "tax cheats" with a number attached. Sales tax is one of many levies whose revenues positively fund government spending. The internet tax, if passed, will just be yet another tax -- and therefore revenue -- for the coffers. Higher marginal rates exists because state-government spending levels are higher, not because of some “absence of tax” that forces states to raise rates.

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In our states’ budgets, current taxes rates (income + sales) are set at levels appropriate to cover the calculations of their spending. 49 out of 50 states require a balanced budget. These states are fully aware of how much of their stated taxes are “avoided” (internet and out-of-state). Therefore, by passing this new internet tax, you are merely giving the states a free reign to add a tax without adding the political heat for it, under the guise of “fairness”. Looked at it another way, it is unconscionable for Congress to pass this legislation without requiring that states lower their marginal rates so that the new tax makes everything revenue neutral. Marginal rates as they are already burden taxpayers. This internet tax doesn’t fix anything -- because there is nothing in their budgets to be “fixed”. True tax reform means broadening the base and thereby reducing the overall burden of taxes. The internet tax is merely a back-door way for states to add a levy on their citizens. It’s a revenue grab. Furthermore, as a practicing accountant, it is highly irrational for legislators to believe that compliance with multiple tax jurisdictions for vendors will be an easy and unburdensome process. The recordkeeping will be excruciating. This idea is similar to the 1099 provision originally included in Obamacare which expanded the reporting requirements to include all payments from businesses aggregating $600 or more in a calendar year to a single payee. Because of the insurmountable amount of reporting and paperwork that was associated with this provision, it was swiftly and subsequently repealed. The effect of distressing our businesses to comply with this internet tax collection will be a drag on the economy. Can you imagine vendors needing to figure such things as whether marshmallows are a taxable food/candy in some jurisdictions while it might be a non-taxable food in others? To think that software can seamlessly make this distinction is ludicrous, especially software run by the government. When has the government ever actually streamlined anything? Implementing such a nightmare of a tax while businesses are already suffering the egregious complexities of adjusting to the trainwreck of Obamacare will certainly stifle businesses even more. Internet tax collection for 9,500 local tax jurisdictions or even just 50 states is too much. If such a tax is to be passed, it should be either a national tax OR a tax payable to the state-of-sale only -- which would ultimately be better for tax competition overall. The economy is suffering enough. We need to encourage growth and businesses to help revitalization. Adding another tax for citizens which also requires burdensome compliance for businesses is not the way to do it. The only circumstances by which an internet tax should be introduced and collected should be 1) treating online and brick-and-mortar retailers as one-and-the-same and 2) implementing a tax cut to the marginal rates so that state revenue remain neutral. Anything less than this makes the internet tax just another revenue stream for our bloated, overspending governments.