A growing number of states are maneuvering to tax the Internet. These schemes will make shopping online dramatically more expensive.
Until recently, the Constitution has shielded interstate consumers from money-grabbing bureaucrats. Individual states have no power to compel out-of-state businesses to become the tax collector on behalf of more than 8,000 state and local taxing jurisdictions. In 1992, the Supreme Court ruled that there had to be a “substantial nexus” between a state and a mail-order business before the latter fell into the regulatory net.
In just the past two years, Colorado, New York, North Carolina and Rhode Island have seized on the “nexus” loophole to ram through revenue-raising laws known as “Amazon taxes,” named in honor of the online retailer that would suffer the most. These measures redefine a company’s physical presence to include small-time entrepreneurs who create third-party Web sites to promote products for online companies in return for a modest commission. Although these individuals and small businesses may earn just $10,000 a year from such deals, the new laws define them as employees, which creates the nexus and authorizes the tax.
This applies an antiquated and parochial view of the world that just doesn’t fit in the Internet age. An affiliate marketer who lives in Colorado is not marketing just to Colorado residents. He uses the Web to sell to the entire country, if not the world. The connection to the state is minimal and not particularly relevant.
Not surprisingly, the effort to crack down on the little guy has backfired from a revenue standpoint. As a report released last week by the Tax Foundation documents, no Amazon tax has ever generated money because Amazon simply canceled its affiliate programs in the affected states. In fact, those jurisdictions lost overall tax revenue as the small entrepreneurs could no longer rely on a key source of income.
Logic would imply that this lesson in unintended consequences would be heeded by others, but it hasn’t. Virginia’s Senate, for example, voted 28-12 to impose an Amazon tax last month. Only the inaction of the House spared the commonwealth from becoming fifth on the list of greedy Internet taxers.
While lawmakers trying to outsmart the Internet have proved themselves fools, some may conceal a motive darker than mere revenue enhancement. Amazon taxes also are a way for brick-and-mortar stores - which have a significant presence in lawmakers’ districts - to hobble their toughest marketplace competitors.
Such cheap protectionist moves should be repealed in their entirety. In the midst of the worst recession in generations, the last thing our ailing economy needs is more taxes drained from the private sector and poured into the unproductive public trough.