Taxing the Net

Sales tax cartel

A coalition of 22 states wants Washington to help them extract cash from the purchases their residents make over the Internet. It won't be easy, thanks to a 1992 Supreme Court decision that limits local jurisdictions' ability to collect sales taxes on online and mail-order transactions. Still, as e-commerce grows and state revenue shrinks, states are finding the Internet an irresistible target.

At press time, Rep. Bill Delahunt (D-Mass.) and Sen. Michael Enzi (R-Wyo.) were preparing to introduce a bill requiring online retailers to collect taxes from customers who live in any of the 22 states participating in the Streamlined Sales Tax Project. By standardizing rates and the list of taxable goods, the participating states hope to get around the Supreme Court's concerns about the burden of forcing  online merchants to follow different states' varied and complicated sales tax rules.

Why not treat online purchases like in-person sales, where the tax is determined by the state where the business is located? Because that approach provides an advantage to states with no or lower sales taxes. It also gives every state an incentive to lower tax rates, a fine outcome for buyers and sellers but not for governments looking to beef up tax revenues.

Adam Thierer of the promarket Progress and Freedom Foundation has spent years tracking such attempts toimpose state taxes on interstate commerce. Those 22 states are "proposing to abandon true federalism," he says. "State and local officials would prefer to create a cozy tax cartel instead of relying on a 'laboratories of democracy' model of competition between the states."