There's No Fairness in Taxing E-Sales

Jeff Jacoby

4/18/2011 12:05:00 PM - Jeff Jacoby

On the homepage of his US Senate website, Illinois Democrat Dick Durbin invites visitors to learn about his record of "Looking Out For Consumers" by protecting them "from excessive fees and predatory practices." Alas, the senator's concern for the welfare of consumers goes only so far. Indeed, he is poised to introduce legislation that would subject millions of American consumers to "excessive fees" they have long been sheltered from: sales taxes on their online purchases.

The tech website CNET reported last week that Durbin, the Senate's assistant majority leader, will offer a bill after the Easter recess that would allow states to force any Internet vendor to collect sales taxes for them -- not just when the vendor has set up shop within their borders, but even when its facilities are located elsewhere. If it passes, Durbin's bill will undo the longstanding rule that merchants only have to collect sales tax for states with which they have a "substantial nexus." That phrase comes from the Supreme Court, which has confirmed the no-nexus-no-tax rule in a line of cases stretching back more than 40 years.

While the court's decisions originally dealt with mail-order catalogs, the logic is just as pertinent to sellers doing business over the Internet. If a company has no shops, offices, or employees within a state, there is no reason it should be obliged to charge sales tax when it happens to sell something to a resident of that state. That is why most Americans pay no sales tax when they buy a product from Amazon, which has an actual physical presence in only a handful of states, while those who make a purchase from Barnes and Noble or Walmart -- companies with outlets nationwide in addition to their online sites -- typically will be charged their state's sales tax.

To hear Durbin tell it, there is something unjust about sparing Internet retailers the burden of calculating and collecting taxes for states they don't operate in. "Why should out-of-state companies that sell their products online have an unfair advantage over Main Street bricks-and-mortar businesses here in Metro East?" he said in February during a meeting with Illinois business owners.

This "fairness" argument is echoed by the Alliance for Main Street Fairness, which lobbies against what it calls the "online sales tax loophole." The Alliance argues that "a sale is a sale is a sale," and that whether it takes place in cyberspace or in the shop around the corner, the sales tax should be collected. On its website, the alliance posts videos from business owners like Mark Jeannette, a Pennsylvania tobacconist who complains that "if someone purchases a box of cigars over the Internet at a discount, and on top of that doesn't have to pay the 6 percent sales tax, they are at an advantage that I certainly don't have."

But it's a hollow argument. All other things being equal, consumers no doubt prefer a tax-free shopping experience. But all other things are rarely equal. E-retailers (or mail-order catalogs) may have a price advantage, but well-run "Main Street" businesses have competitive advantages of their own. They attract customers with eye-catching window displays. They play up local ties and neighborhood loyalty. They give shoppers the chance to see, feel, or try on items before buying them. They enable the serendipitous joys of browsing. They don't charge for shipping. And they offer potential customers a degree of personal service and warmth that no website can match.

The current system is far fairer than the one Durbin wants. Brick-and-mortar merchants charge sales taxes based on their physical location. The exact same rule applies to online merchants. A Pennsylvania tobacco shop doesn't collect Ohio sales taxes whenever it sells a humidor to a visitor from Ohio. Amazon shouldn't have to either.

"Out-of-state companies that aren't paying their fair share of taxes," Durbin argues, "are sticking Illinois residents and businesses with the tab." With what tab? Taxes paid should bear some relation to services received, and merchants with no "substantial nexus" to a state receive little or no services from it. They don't use its firefighters or sewers, don't send their kids to its schools, and don't expect it to plow their streets after a blizzard. To force them nevertheless to collect and remit that state's taxes would be grossly unreasonable.

Durbin's bill would only hurt the consumers he claims to be "looking out for." The existing arrangement has worked well for 40 years. The only thing it needs from Congress is a good leaving-alone.