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Taxation After Lots Of Representations

12:00 AM, May 11, 2013 • By IRWIN M. STELZER
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Governments everywhere are on the prowl for more revenues. French president François Hollande wants to tax incomes in excess of €1 million at a 75 percent rate. Britain’s chancellor of the exchequer, George Osborne, has jacked up VAT. Southern Europe’s finance ministers have come up with the novel idea that taxes owed should be collected. Here, President Obama would get more pocket money by raising income tax rates on “the rich” -- families earning more than $250,000 per year -- reducing the amount they can deduct for charitable contributions, dipping into their tax-advantaged IRA accounts, and plugging what some choose to call “loopholes” in the tax code.


All tax collectors are guided by the rule laid down some three hundred years ago by Jean Baptiste Colbert, Louis XIV’s minister of Finance, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” And, if he served in a democratic country rather than in an absolute monarchy, he might have added, with the largest backing from voters for whom “fairness” is the ultimate test of any new tax, and for whom equity trumps efficiency every time. Taxing the rich might stifle their incentive to invest, and be inefficient, but if it seems “fair,” theirs is the goose that will be plucked, especially since their hisses are too few to be audible to politicians over the roars of the crowd.

Tens of thousands of small bricks and mortar merchants here have long complained that they must charge customers state and local sales taxes -- which run anywhere from 5 percent to about 10 percent -- while Internet companies offering the same merchandise deliver it free of tax. Not all merchants subject to tax are small retailers: The aggrieved include the likes of Walmart, Best Buy, and other big box chains. But the giant retailers have stayed in the background of the Internet tax fight, leaving that battle to the politically more sympathetic Main Street merchants that Walmart and other giant advocates of Internet taxation, suddenly sensitive to the needs of small merchants, have often put out of business by out-competing them for customers’ favor.

If the House of Representatives goes along with a bipartisan bill passed by the Senate last week, the odds that it will are put at 40 percent before the lobbyists go to work, Amazon et al. will have to charge the sales tax prevailing in the home base of their customers, collect that tax, and remit it to hundreds of state and local authorities. Because this would be administratively burdensome for very small Internet sellers, retailers with annual sales of under $1 million would be exempt. Ebay is lobbying to have that lifted to $10 million to protect the not-so-tiny retailers who use its system.

This drive to tax Internet sellers suits Amazon just fine. The giant online seller of just about everything faces increasing competition from Walmart and other large bricks-and-mortar chains that have begun offering same-day delivery, still another example of how competition can goad incumbents into offering better service. Jeff Bezos, the brilliant creator of Amazon, knows that such same-day delivery is a threat to his next-day, or three-day delivery offer. So he is starting to scatter warehouses around the country so that he can offer same-day deliveries -- Amazon’s competition forced supermarkets to improve their service, and their response is forcing Amazon to improve its service to customers -- and now has a physical presence in 19 states, 17 of which have state sales taxes. That physical presence creates the so-called “nexus” that creates a sales-tax liability. And the 45 states and hundreds of localities levying sales taxes argue that even if Amazon has no physical presence, it uses their roads, and relies on police and fire protection provided to in-state companies that deliver its goods. So Bezos has decided he can no longer fight the tax collectors, and wants to make sure that his Internet competitors are also geese about to be plucked.

Those opposed to the new taxes -- proponents say the tax is not new, it always existed but has never been paid by the customers who were supposed to self-report their purchases -- have been arguing that the states should respond to tax-free Internet competition by eliminating their taxes. But in these days of fiscal stringency the tax-cutters’ voices are drowned out by the roar of politicians preaching the virtue of fairness to small local merchants, while sotto voce reminding Walmart and friends of their service to the giants’ bottom line and their need of campaign funds.

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