The class warriors in Congress won’t rest until everything is taxed multiple times. The idea that online retailers aren’t collecting tribute for states in which they have no physical presence galls Sen. Richard J. Durbin, Illinois Democrat, and Rep. John Conyers, Michigan Democrat. So they dreamed up the Main Street Fairness Act to force Internet shoppers to prop up the big spenders in state government.
Crony capitalists are lining up in support. Big players in the online space such as Amazon and others with nationwide physical footprints such as Sears are pushing the legislation. EBay, the Electronic Retailing Association and the National Taxpayers Union oppose it.
States have long drooled over the possibility of diverting a cut of online sales into their coffers. Fortunately, they’ve been thwarted by the Constitution. In 1992, the Supreme Court held that there has to be a “substantial nexus” between a state and a retailer before a state may require the retailer to collect sales tax. For a brick-and-mortar business, that means a retail location.
For a “pure play” business like Amazon, several states - California is the latest - have tried to establish the nexus by going after affiliates. These small entrepreneurs create third-party websites to generate sales in return for a modest commission. These taxation efforts largely have been fruitless because Amazon has simply severed its relationship with affiliates in places such as California and Rhode Island to avoid being subjected to state sales taxes. The net result of such greedy tax grabs is that states wind up losing revenue from the income that those canceled affiliate sales would have generated had Amazon stayed in the state.
While the big players have been effective in fighting tax efforts at the state level, they support a “federal simplified approach” that just happens to be bad for their smaller competition. Upstart retailers would be hurt most by this law, as compliance and deadweight costs are expected to be as much as 17 cents for every dollar, by one estimate. That’s enough to drive the little guys with smaller margins out of business, which is the last thing we need with the economy slowing to a crawl.
To add insult to injury, the tax revenue at stake is comparatively trifling. According to Mr. Durbin, states were expected to “lose” as much as $24 billion in uncollected taxes on Internet and catalog sales. However, a 2010 study by Jeffrey A. Eisenach of Empiris and Robert E. Litan of the Brookings Institution estimated that such revenues would be about $4.2 billion annually for 2008-12. If small businesses were exempted from the requirements, that number would drop to $2.7 billion annually. That amounts to two-tenths of 1 percent of total state and local tax revenues - practically a rounding error.
The states don’t need more revenue; they have a spending problem. According to a Mercatus Center study, state government spending between 2000 and 2009 grew at an average annual rate of 2.6 percent, almost twice as fast as private-sector spending, which grew at 1.4 percent. Stifling innovative businesses that create jobs would only serve to weaken the overall economy.