John Feehery: Speaking Engagements


Internet Tax Shopping

Posted on July 14, 2010

One of my wife’s favorite hobbies is taking out the laptop and shopping online.  She can buy clothes for my son, she can shop for shoes, she can get great deals at a variety of stores, and she can do it without paying pesky local taxes.

That is because under U.S. law, local and state government can’t collect taxes on Internet sales.   That may start to change under the Democrats in Congress.

As Congress left to go on the 4th of July recess, Representative Bill Delahunt, a Democrat from Massachusetts, introduced a bill that requires small businesses to collect sales tax on Internet transactions.

Delahunt announced that he was retiring at the end of the year, which may explain why he is taking the lead on this unpopular issue.

The bill was referred to the Judiciary Committee, because while this bill concerns taxes, it is first and foremost a bill about federalism.

Does a locality have the right to tax a business that isn’t located in its jurisdiction?

Does a state have the right to raise taxes on companies that don’t do anything other than import products into the state?

These are not trivial questions.  The issues are significant.  On the one hand, states and local government are going broke and they need revenue.  On the other hand, the e-commerce is the future of economic growth in the country.

State and local government are going broke not because of lost revenue from Internet sales.  They are going broke because they spend too much money on things they can’t afford.  They want the tax revenues because they don’t want to cut spending.

There is no question that e-commerce is the economic engine for growth.  In 1984, Internet devices numbered 1,000 in the U.S.  In 1992, there were one million.  In 2008, there were one billion.  Who knows how many devices there will be in 2016?

It took the telephone 38 years to reach 50 million users. It took television 13 years, the Internet 4 years, the iPod 3 years and Facebook 2 years.

Clearly, this Internet thing, with all the tubes and everything, is going to be around awhile.  Will installing a new tax scheme on Internet sales slow that growth?  Hard to say, but why take the risk?

In 1992, the U.S. Supreme Court's Quill decision determined that states could not force remote sellers to collect sales taxes because of the tremendous burden it would impose on those businesses.  In this era of persistent and chronic joblessness, is this really  the best time to test that proposition once again?

A new tax scheme would likely hit small businesses, businesses that don’t have the sophistication or the resources to figure out how to comply, the hardest.  Since these are small businesses that create the bulk of new jobs, that could be problematic.

There is a split in the business community on this issue, though.  Some retailers, especially retailers that don’t do most of their business online – jewelers for example – argue that the playing field is tilted against them and they want these taxes imposed on competitors from out of state.

Their reasoning is simple.  If I have to pay these stupid taxes, then you have to pay these stupid taxes.  I have a better idea.  Let’s get rid of all of these stupid taxes.

One other point needs to be made.  Once we empower the State of Massachusetts to be able to force small business that are not located in the Bay State to collect taxes on their behalf, what is stopping foreign countries – let’s say France for example – from doing the same thing?

Well, nothing, and that’s the big problem.

The Internet is currently the best thing this economy has going for it.  It is the place for growth and it is the best place for small businesses.  Allowing the Delahunt bill to go into law will make the Internet an unfriendly place for small businesses to do business, and that is why it should be stopped.

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