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Internet Sales Tax – A Wolf in Sheep’s Clothing

The opinions expressed by columnists are their own and do not necessarily represent the views of
Your taxes are about to be raised; and guess who’s behind it. Here’s a clue – it’s not the Democrats. Despite all the talk about reducing the size and scope of government during their campaigns, and railing against President Barack Obama’s proposed tax hikes, a number of Republican governors are advocating for a sales tax on Internet sales.

Last week, media outlets reported that several Republican governors are pushing an Internet sales tax on purchases from popular online retailers, including Amazon and eBay, in effort to shore up their state budgets. This effort is being led by New Jersey Gov. Chris Christie, who is slated to deliver a prime-time address at the party’s national Convention in Tampa next month (probably not focusing on raising taxes).

This effort is not new. For years, money-hungry politicians have been pushing for an online sales tax to pad state coffers. But past efforts, including those I opposed during my tenure in the House from 1995 to 2003, proved unpopular and proponents were forced to back off. This time, however, supporters of the scheme claim an online sales tax is inevitable.

According to the Wall Street Journal, Gov. Christie says a new tax on Internet is “an important issue to all the nation’s governors. Sen. Lamar Alexander (R-TN), who is shepherding the charge in Congress, told the Wall Street Journal an online sales tax “is going to happen – if not this year, then definitely by next year.”

Currently, states can only impose a sales tax on businesses actually within their borders. When a consumer purchases a product from an online retailer, no state sales tax is applied.

Republican governors, like Christie, are masking the tax plan as a move for “fairness” to retailers based in their states. They claim online retailers have an “advantage” over traditional retailers because they manage to skirt sales taxes. According to this view, consumers can visit a local retailer, try out electronics or other products, but then purchase them at home online. The extent to which consumers actually engage in such actions just to save sales tax, is speculative; but that does not deter the tax advocates from repeating the claim.

Not surprisingly, online retailers – including Amazon -- traditionally have opposed proposals by states to impose online sales taxes. But with Amazon now seeking to expand its on-the-ground footprint in order to shave costs and delivery times, the company is now willing to cut deals with states. And states are eager to play “Let’s Make a Deal.”

This was the case in New Jersey, where Amazon offered to exchange building new distribution centers -- promising to create some 1,500 jobs -- in return for supporting a state sales tax on its Internet sales but with a delayed phase in.

It is beyond dispute that state governments are suffering as a result of the continuing, now four-year-old economic downturn. And many governors, Christie included, deserve credit for taking steps to meet these fiscal challenges by making some tough cuts to some state spending programs. But this latest move represents serious backsliding by governors who – when push comes to shove – still would rather look for ways to raise more revenue from taxpayers then to continue wielding the budget scalpel.

The Christie-Alexander plan is not without risks. Many Republican governors pledged in their campaigns they would not raise taxes on citizens in their states. Grover Norquist, president of Americans for Tax Reform, notes that the bills being pushed in Congress to allow states to collect online sales are troubling, and not simply because of the $23 billion it could raise in new revenues.

As Norquist explains, an Internet sales tax would “dissolve the physical nexus standard for tax collection, allowing tax administrators to reach well across their borders for new revenue.” While this is a new avenue in the battle over higher taxes, it is familiar to tax fighter Norquist. “We've grappled with states burdening non-residents with their tax codes once before,” he notes -- “it was called taxation without representation.”

The move to tax Internet sales, clothed as a “fairness” issue, is the typical “wolf-in-sheep’s-clothing” ploy so often used by governments unwilling to cut expenditures to match revenues. It matters not whether its proponents have a “D” or an “R” after their name. It is a tax increase in either case.

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