Internet sales tax protects Amazon from the next Amazon

By Grant Bosse
After 15 years trying to take a bite out of the Internet, state tax collectors took a huge step closer this week. The U.S. Senate voted to advance legislation allowing states to force online retailers to collect sales taxes for them.

The 1992 U.S. Supreme Court decision Quill Corp. v North Dakota prevented states from drafting out-of-state businesses as tax agents unless they had a significant physical presence in that state. The Internet sales tax bill, dubbed the Marketplace Fairness Act by some staffer who’d read Orwell, would force retailers to collect taxes based on the buyer’s address, even if the seller was in a state with no sales tax.

At issue isn’t the sales tax itself, but the little understood “use tax.” Massachusetts assesses the use tax on residents who buy cars in tax-free New Hampshire but register them in the Bay State. The law actually requires Massachusetts residents to keep track of everything they buy in New Hampshire that would be taxed if bought in Massachusetts. Few do so.

Tellingly, the use tax doesn’t apply to purchases made in states with a sales tax. It is a punishment imposed on consumers fleeing high taxes and an attempt by politicians to reduce tax competition with their more frugal neighbors.

Elected officials do not react to tax collection arguments in the predictable partisan ways we expect on other tax debates. Former Republican governor Craig Benson wanted to tinker with the New Hampshire business profits tax to get out-of-state businesses to pay more. Former Democratic governor John Lynch raised taxes and fees more than 100 times but valiantly fought off Massachusetts’s attempt to get New Hampshire stores to collect and pay its use tax for them. The U.S. Senate fight over the Internet sales tax had Republicans and Democrats on both sides.

New Hampshire Sen. Kelly Ayotte, a Republican,  has been leading the fight on the Senate floor to kill the Internet sales tax bill. Sen Jeanne Shaheen, a Democrat, has been quieter in her opposition. Last week she objected to the Senate fast-tracking the legislation and offered a series of amendments to improve it, including an exemption for states like New Hampshire that don’t have any sales tax.

Of course, we would have a broad-based sales tax if Jeanne Shaheen had gotten her way as governor, but that’s so last decade.

Shaheen also missed the first vote on the Marketplace Fairness Act on Monday, blaming a delayed flight. But she joined Ayotte in opposing cloture on the bill Thursday evening. I’m sure my Democratic friends will protest Shaheen’s filibustering obstructionism any day now.

The Marketplace Fairness Act would force online retailers with annual sales of over $1 million to collect sales tax for each customer based on where the product is delivered. It would also push states to streamline their tax codes.

There is nothing preventing states from taxing online sales originating in their state, but most don’t. That might encourage companies to seek friendlier states. States would much rather punish their citizens for buying from out of state, raising money and currying favor with local retailers.

That’s exactly the point. I don’t want to pay sales tax on stuff I buy online from sales tax states. If they start charging me, I can search for vendors in tax-free states like New Hampshire. Such a policy would draw sharper distinctions between low-tax and high-tax jurisdictions. Basing taxes on the seller’s location would force politicians to face the consequences of their tax policies, rather than exporting those costs to out of state businesses.

Some of those businesses are eager to face those higher costs. Online giant Amazon.com is pushing for the internet sales tax. It can track state and local tax codes and automatically charge the current tax rate based on the delivery ZIP code. But smaller companies looking to challenge Amazon’s hegemony would have a hard time complying. Higher taxes and complicated bureaucracy isn’t a threat to Amazon, but it might keep the next threat to Amazon from starting up.

At National Review, Kevin Williamson writes about the distinction between being for big business and being for free enterprise. Big business loves big government. It’s smaller, nimbler businesses they fear. Forcing a cumbersome sales tax bureaucracy on their would-be rivals puts them at a huge competitive advantage.

Taxing online sales wouldn’t cost New Hampshire residents much in the short term. We don’t have a sales tax, so we wouldn’t have to pay it. But it would erode our ability to attract online retailers, at least those that hope to grow to a million in annual sales. Ayotte and Shaheen are going to lose this fight in the Senate. Here’s hoping the House kills the internet sales tax.

Grant Bosse is editor of New Hampshire Watchdog, an independent news site dedicated to New Hampshire public policy. New Hampshire Watchdog is not affiliated with the Live Free or Die Alliance.

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