What the Internet Sales Tax Is All About

By John Tamny

Just curious, but if a Washington, D.C. resident buys a pack of cigarettes in Arlington, VA, should this person pay a sales tax to the District of Columbia? Figure that cigarettes cost roughly $5.25/pack in Virginia versus $7.99 in D.C. Arlington retailers have a significant tax advantage over merchants in the District, so to “level the playing field” shouldn’t D.C. residents hand over the difference in taxes? The tax will ensure that Washington residents don’t cross the bridge in order to get a better deal, and in the process imperil Capitol-based businesses.

It all sounds right, doesn’t it? If businesses in low-tax areas exploit the tax difference, Washington’s retailers could be in a world of hurt, as will be its tax base.

Except that tax competition among cities and states serves a very real purpose: it forces local taxing authorities to think long and hard before helping themselves to more of what we earn. Absent our ability to take our consumption elsewhere, what’s the incentive for local and state legislators to keep taxes low? Also, we seem to forget that local businesses, precisely because they’re local, have the ultimate sales advantage in that they’re nearby, sometimes walking distance, plus they enjoy name recognition that declines the farther the business is away from the consumer.

Who knows, but it’s a good bet that —most regardless of ideology—would blanch at the notion of reporting all purchases completed outside the city and state they live in so that they could be taxed on those purchases. Most would say it’s our right to find the best deal possible on goods and services, and this includes traveling near or far away.

All of which raises a basic question: if it’s our right to travel to the best deals possible, including deals made that way by more enlightened tax regimes, why can’t we go online to find the best deals without having our pockets picked? No reasonable person would support a byzantine system whereby a retailer in Virginia would collect taxes for Washington D.C.’s Office of Tax and Revenue, and most would certainly not be pleased if required to report all purchases outside D.C. so that they could be taxed, but all too many think that internet purchases should be taxed locally.

Getting into specifics, a D.C. resident who buys a pack of cigarettes inside an Arlington establishment won’t be expected to pay the D.C. sales tax, but if this same resident buys the cigarettes from an Arlington retailer online, the Office of Tax and Revenue expects its cut. Worse is that the Supreme Court agrees that the D.C. government should be able to take its cut. How very shameful.

The Purpose of the Tax

To see why, it’s worth backtracking however briefly. Seemingly the point of sales taxes is that they pay for local government services of the police, fire, and general infrastructure variety. Naturally local businesses would collect them simply because they’re the alleged beneficiaries of these local services. Not so businesses outside the tax jurisdiction.

If an internet retailer in Pasadena, CA sells a good or service to a resident of Washington, D.C., simple logic dictates that the transaction not be sales-taxed in Washington, D.C. It shouldn’t because the business isn’t in Washington. It’s on the other side of the country, and there the business will pay Pasadena taxes. So when judges and politicians talk about the importance of levying sales taxes on outside vendors, what they’re really saying is that they want government to dip its hands into our pockets twice.

Stating the obvious, the internet sales tax isn’t about leveling the tax playing field as much as it’s yet another grab of the economy by politicians. “Grab of the economy” is an apt phrase simply because politicians don’t tax away our dollars to stare lovingly at them; rather they take our dollars for what they can be exchanged for. The more tax dollars that politicians collect, the greater their ability to be size buyers of cars, trucks, land, buildings, and most economy-suffocating of all, human labor. Having decided they’re not collecting enough of what we earn, and plainly averse to competing with other locales when it comes to keeping taxes down, gluttonous local governments naturally love the idea of using internet commerce as another way to take.

Internet Sales Taxes Are Tariffs

About all this, let’s make no mistake about what these tax-thirsty governments are doing. Much like businesses that seek protection from competition, they’re seeking protection from lower-tax cities, states and countries. To be very clear, they’re seeking tariff-protection. Let’s call them domestic protectionists.

In tariff terms, it’s accepted wisdom that barriers to imports don’t just harm consumers who suffer shrinking paychecks. Worse about tariffs is that they shrink the division of labor that enables rampant specialization. Specialization is what drives productivity. Applied to internet taxes, what harms us globally also harms us locally. When governments are empowered to locally tax a transaction that took place far away from where the consumer actually resides, they’re explicitly foisting a domestic tariff on the transaction.

What’s offensive about all this is that the Supreme Court didn’t pick up on what is plainly a backdoor tariff foisted on the American people. A Court that’s required to elevate the Constitution, and in doing so ensure that trade among American citizens is regular and free, has empowered cities and states to effectively put up tariff barriers to trade through a wholly invented taxing power. If this is doubted, readers need only ask again if they would cheerfully pay local taxes on transactions made in person, but not in the city or state they live in. Not a chance.

Looking ahead, here’s hoping the internet tariff is revisited by future Courts, as it’s plainly a restraint on trade. If cities and states really want a bigger cut of our consumption they should either raise local sales taxes, or they should demand that we report what we purchase outside where we live. Rather than hiding behind the courts in order to force non-constituent businesses to collect taxes for them, they should stand up and collect taxes on their own. And when voters vote them out, a message about excessive taxation will have been sent to all grasping politicians.

Reprinted from Forbes and sourced from FEE.org

John Tamny is a Forbes contributor, editor of RealClearMarkets, a senior fellow in economics at Reason, and a senior economic adviser to Toreador Research & Trading. He’s the author of the 2016 book Who Needs the Fed? (Encounter), along with Popular Economics (Regnery Publishing, 2015).