It is with increasing frequency that I have been reading editorials and letters to the editor arguing that Mississippi, and the other 49 states should require all companies to collect sales tax on internet sales. As the owner of a Mississippi-based company which sells specialty products globally over the web, we believe that readers should hear the other side of the story.
To be clear, we are NOT arguing that internet sales should be made free of tax. However, requiring online merchants to collect taxes on all sales, and to comply with the myriad of rules, regulations, reporting requirements and physical audits from an estimated 10,000 taxing entities nationwide surely ranks among the most anti-business, job-killing proposals ever. The costs of compliance for all but the largest web-based merchants will be crushing, which is why this initiative is being supported by the likes of Amazon, Wal-Mart and other internet elephants able to afford armies of accounts, tax lawyers and audit defense teams.
Both “brick and mortar” and internet merchants currently pay taxes on sales within the jurisdiction of the cities, counties and states where they reside. Under this arrangement, all merchants have political representation where they collect and pay taxes. Merchants also receive public services provided to them by these same taxing government entities.
Proponents of internet taxation will point to the fact that there could be “exemptions” for small internet retailers below a certain size. Can there be a stronger disincentive for growth and job creation than avoidance of whatever the ultimate threshold might be? Supporters will also tout the “easy to use” tax compliance software which supposedly automates all sales tax chores including collection, disbursement, reporting and audit compliance. “Magic software” is fairy dust, conjured up by folks who have never had to deal with government taxation. Perpetually short of cash, state and local taxing authorities have grown increasingly aggressive, sending out auditors and claiming nexus and unclaimed property nationwide. Does anyone really believe that the opportunity to actively audit nationally for additional sales tax dollars will be ignored?
The vast majority of web-based businesses are small to medium-sized purveyors of specialty goods, with national or global customer bases which cannot be economically served through the “bricks and mortar” business model. Other web-based businesses have attacked narrow segments of the large retailers’ offerings, competing more efficiently without the associated overhead. While tax-free has undoubtedly benefitted internet commerce, it is not the sole reason for the explosive growth of this segment. It is the opportunity to now cripple these nimble, internet-based competitors which has united the big box retailers and mega-internet participants. Governments of all size, enticed by the promise of more tax revenue, are now being recruited in this effort.
Tax laws in most states already require internet customers – you know, the ones with political representation and who actually receive municipal services – to disclose internet purchases and to pay taxes on those purchases. Widespread ignorance or avoidance of internet tax laws by consumers has meant that these taxes have gone largely uncollected. This leaves politicians in the uncomfortable position of having to crack down on the very constituents who vote them into office. Better to pretend that requiring internet businesses to collect sales taxes nationwide is really no big deal than to face an angry electorate.
Beware the law of unintended consequences in what may appear to be a simple fix to the sales tax problem.