Washington Is Chasing a Ghost on Internet Tax Revenue | Commentary
In 1998, Congress passed the Internet Tax Freedom Act, which placed a three-year moratorium on new Internet taxes. In April of 2000, I was proud to serve as chairman of the Advisory Commission on Electronic Commerce. Created by Congress, the commission was established to develop recommendations that would help further economic growth in the digital age. In our report to Congress, a majority of commissioners recommended that Congress maintain the moratorium on new Internet taxes. This week, unfortunately, the Senate reversed course. This is unfortunate because, while much has changed in the 13 years since we made our initial report to Congress, the recommendation to keep the Internet tax free is as relevant today as it was then.
Technically there is no such thing as an “Internet sales tax.” There are only sales taxes and the manner in which they are collected. A vote for the Marketplace Fairness Act was a vote to impose a national sales tax collection mandate on Internet sellers. A vote for the Market Place Fairness Act was a vote to allow tax collection beyond state borders, even when a business maintains no physical presence in a particular state. This is a radical departure from existing tax law. Empowering states to collect sales taxes on transactions that take place outside their borders is a significant expansion of current state taxing authority that is fundamentally unfair and should be opposed for that reason alone.
In 2012, according to the U.S. Census Bureau, online retail sales were $225 billion — a number that still represents only 6 percent of total retail sales. Of that $225 billion, big-box retailers accounted for more than 83 percent of those sales. These are companies such as Wal-Mart, Best Buy and Amazon — some of the most recognizable names in commerce. These online companies have brick-and-mortar stores in many or all states, and as a result they are currently required to collect sales taxes in those states. Were those sales to remain untaxed as proponents claim, that could certainly represent a problem for state and local coffers. The fact is, however, that the majority of Internet sales are being taxed, which is precisely why the Marketplace Fairness Act is a solution in search of a problem that does not exist.
The Internet still represents a global tool of empowerment for citizens, consumers and entrepreneurs. While the manner in which consumers engage in commerce online continues to evolve, our existing sales tax law remains remarkably durable. In 1999, Amazon was essentially an Internet-only retailer with the exception of one or two distribution facilities that triggered sales taxes in those states. For state and local government officials, that represented a frightening harbinger of the future of retail in which all commerce would migrate online and outside their taxing jurisdiction. Today, Amazon has a physical presence in almost 20 states. The dire warnings about the future of commerce have not come to pass.
Thirteen years ago, the economy was booming and the Internet was in its infancy. Young, innovative online companies were emerging almost daily with only the potential to disrupt traditional brick-and-mortar retail sales, threatening the sales tax base on which state and local governments have come to depend. Local governments sounded the alarm: In 15 years, we were told, online sales would represent a majority of all retail sales and the resulting collapse of the state sales tax base would be catastrophic for state and local budgets. Those predictions have proved to be false. Unfortunately, the Marketplace Fairness Act is still based on those false assumptions.
When the Internet is 50 years old, hopefully there will still be innovators and entrepreneurs using it to grow into big, global companies. If the Marketplace Fairness Act becomes law, we will come to regret severely disadvantaging emerging companies with this legislation. In the 15 years that Congress has been debating this issue, the real world has passed it by. As small companies grow and seek a competitive advantage, they will find new ways to provide value and service to customers. When they do, they will build physical stores or add distribution centers for faster delivery. In doing so, they voluntarily avail themselves of the services and the taxing authority in those states without the need for congressional intervention. Congress has not kept pace with this evolution. The Marketplace Fairness Act is neither fair nor does it reflect the reality of markets. Despite Senate passage, the House should continue to oppose this unnecessary and burdensome legislation.
James S. Gilmore III was the 68th governor of Virginia, from 1998 to 2002. He currently serves as president of Gilmore Global Group LLC, a boutique consulting firm.