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Live From New York
How Not to Tax the Internet
Gov. David Paterson wants tolls on the information superhighway
Imagine having to pay taxes to a state you don’t live in just because you do business with someone who does. If you’re an Internet retailer, you don’t have to imagine. You have to pay.
New York Governor David Paterson (D) signed legislation last year requiring non-New York companies like Amazon and Overstock.com to pay New York sales taxes. The legislation is now being challenged in court.
The polite term for this is taxation without representation.
Neither Amazon nor Overstock has any physical presence in New York State. But some of their “affiliate” websites do. An affiliate is a website that links to, say, Amazon products, and receives a small percentage of any sales resulting from those links. Call it a finder’s fee.
Affiliates are not owned by Amazon. They are independent entities. Yet Governor Paterson and the New York legislature maintain that such tenuous connections to their state are enough to force Amazon and Overstock to collect and pay sales taxes on any products they ship to New York.
This is not good policy under any circumstances. During a recession, it’s destructive. When the new law came into effect last June, Overstock severed ties with more than 3,400 New York-based affiliates.
Paying taxes to a government that provides you with services, and where you can vote for or against the politicians setting tax rates, is one thing. But to pay taxes when you get no benefits and no democratic say is simply unfair.
Nor is it feasible. The more states that join in, the more expensive it becomes for companies to do business across state lines.
Already, five states are jumping on the bandwagon. California, Connecticut, Hawaii, Minnesota, and Tennessee all have Internet tax proposals in the pipeline, relying on the presence-by-affiliate argument. More are sure to follow.
Add in cities and counties, and we have about 11,000 sales tax jurisdictions in the United States. Every single one of them could use New York’s logic against outside Internet retailers.
As April 15 approaches, we need no reminder of the difficulties of complying with the tax code. State and federal returns are bad enough on their own. Imagine filling out 11,000 forms every year.
It is true that sales taxes are simpler than income taxes. But 11,000 forms are 11,000 forms. If New York’s tax precedent becomes the norm, that’s what companies across the country may have to go through.
New York’s thirst for revenue is not surprising. The state is in poor fiscal shape. The budget deficit is estimated to reach $13.7 billion this year. Revenues are down and spending keeps going up, even after targeted budget cuts.
The real surprise is that courts haven’t thrown out Gov. Paterson’s sales tax scheme. According to Supreme Court precedent, it is unconstitutional. The 1992 Quill v. North Dakota decision confirmed that a state may only collect sales taxes from companies that are actually located in that state.
New York and other revenue-hungry state governments would like to do away with Quill. They prefer what policy wonks call destination-based taxation. That means that everything that New York consumers purchase would be subject to sales tax, no matter where the seller is.
About the Author
Ryan Young is Fellow in Regulatory Studies at the Competitive Enterprise Institute.
Letter to the Editor View all comments (19) | Leave a comment
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Pete Eyre | 3.24.09 @ 10:17AM
What's the name of the case in NY? Any idea how folks think it'll be decided?
How long until a sizable company takes a principled stand and tells the government "no"?
Dean Vander Linde| 3.24.09 @ 11:49AM
I seriously question the legality of states imposing sales taxes on products that originate in another state. That is interstate commerce, and only Congress has the power to regulate it. God forbid that Congress gets involved in this situation.
I buy books through the Internet, and have bought books from dealers in perhaps half of the states, as well as the UK, Canada, and Australia. Does the government expect these small businessmen to keep accounts for sales tax for each transaction, and then send checks for $1.00 or $2.00 to the respective states to pay for sales taxes? Like so many government actions these day, the Internet tax idea reeks of greed and stupidity by the politicians.
Griff| 3.24.09 @ 1:18PM
Dean,
States impose sales tax on products that originate in other states all the time (think automobiles). I think the issue that started these tax-hungry mongrels on their quest is this: In what state does the purchaser reside? We've already seen this in practice when the "fine print" says, "Residents of XYZ please add x% to your order price."
JD| 3.24.09 @ 5:11PM
Keep it up, pols, you have no clue about the nature of the fire you're playing with.
You have never even conceived of the kind of underground economy that will spring up as a result of your constant overreaching. Everything has a limit; yours is marked by the line where the citizenry finally rejects your ever increasingly-worthless monopoly money. Since it is still so young, and you so short-sighted, you have thus far failed to grasp the fact that the internet is a fundamental game-changer in this respect. So keep on pushing; we will tolerate you for as long as it remains more convenient for us to do so. At some point, however, our patience will have been exhausted. The coming revolution will not be a physically-violent one; it will be purely monetary. Once it gains inertia, and this is ultimately inevitable, you will be helpless to stop it - starved of funding, your conventional means of control will have been rendered utterly useless. Remember, physical military power is a consumer, not a producer, of value.
Somewhere along the line, you have forgotten the most important rule: you need us, but we don't need you.
Joe| 3.24.09 @ 5:54PM
I have a question for the sales tax folks. I live in Kentucky and I buy a gift for a friend in Tennessee. While in a hotel in Indiana, I call an operator in South Dakota that works for a company located in California and the gift ships from a warehouse in Nevada. My credit card issuing bank is in Ohio and the billing goes through Delaware. Who gets the sales tax? When this question can be answered with clarity and consistency, we will know how to tax these purchases.
PJ Doland | 3.24.09 @ 6:22PM
Logistically, this kind of thing is a disaster.
But...you can be sure Amazon and other online retailers would do a lot less business if they didn't have a significant price advantage over brick and mortar stores that have to charge sales tax. The current system basically amounts to a giant subsidy to UPS and Federal Express.
Tom| 3.24.09 @ 8:11PM
Pa. has what is called a sales and use tax. That means that if I purchase something within the state I pay 6% sales tax. If I buy something from another state I am obligated to pay use tax which is 6% Residents of Allegheny and Philadelphia County have to pay an extra 1% tax, sale or use.
So it isn't what it is but what it is called that matters in some cases.
MJW | 3.25.09 @ 12:36PM
"The 1992 Quill v. North Dakota decision confirmed that a state may only collect sales taxes from companies that are actually located in that state."
Mainly because of the difficulties for an out of state company to know what the sales tax rate is. The decision also said that only Congress can change things. Here's the actual ruling: http://www.law.cornell.edu/supct/html/91-0194.ZO.html
Hence this plan: http://www.streamlinedsalestax.org/
I rather like the origin based sales tax plan. Oh wait, my books are shipped & billed out of New Hampshire, one of 5 states without a sales tax.
Sandra| 3.27.09 @ 11:48PM
Sigh.
I enjoy your blog at CEI and the one at inertiawins.blogspot.com.
I really don't know how we're going to stop these rapacious idiots in time.
Disagree| 4.8.09 @ 9:53AM
Sorry, but I think you're off-base here: As I understand sales taxes, the buyer pays; the retailer only collects. Seems fair to me that an out-of-state business shouldn't get a huge competitive advantage over one willing to set-up shop, employ people, etc., in state.