Stupid Debate Watch: A Lame Defense of Net Taxes

Joe Weisenthal over at Silicon Alley Insider last week published what superficially would seem to be a reasonably compelling argument for Internet sales taxes.

However, he utterly failed to address the most important arguments against such taxes.

“For years the Internet has enjoyed its status as a relative haven from taxation, much to the chagrin of sales-tax-reliant states,” Weisenthal wrote. “But with the fiscal situation growing more and more dire across all levels of government, and Internet commerce continuing to eat into traditional forms of business, the lack of Internet taxation sticks out like a sore thumb.”

He then made three basic points: The government needs the money online-sales taxation would produce; the argument that taxation will kill online innovation is losing steam; and taxing bricks-and-mortar commerce but failing to tax e-commerce is regressive because it allows relatively affluent Internet shoppers to get away sales-tax free.

“There’s no particularly compelling reason to offer a tax-haven to those who are more likely to be shopping online,” Weisenthal wrote.

Oh, really?

New and/or higher sales taxes always create avoidance behavior and often have unintended, horrendous ramifications. Moreover, aiming sales taxes at the affluent doesn’t necessarily bring in more tax revenue.

Consider the following:

Riding a wave of post-1980s backlash against the rich, Congress in 1990 passed a budget that called for a 10% luxury tax on the purchase of furs and jewelry in excess of $5,000, autos in excess of $30,000, and boats and yachts in excess of $100,000.

In the first half of 1991 after the luxury tax went into effect, sales of boats priced from $100,000 to $300,000 reportedly dropped 61%. Sales of boats costing more than $300,000 reportedly fell 87%.

The tax also reportedly depressed sales for boats priced less than $100,000 because people mistakenly thought it applied to all boat sales. What’s more, to avoid the tax, people turned to used boats, or bought from foreign builders and registered their boats in Canada, Mexico, the Bahamas, and other Caribbean islands.

And the tax didn’t just hurt boat builders and dealerships. It hurt peripheral industries, as well.

For example, according to an article in Folio Magazine at the time, the tax was killing boating magazines.

“Ad space is down dramatically in the first six months of 1991, as compared to the same months last year,” said Chris Donahower, publisher of Cahners’ Motoryacht International and Power and Motoryacht, according to Folio. “While I cannot blame this entirely on the tax, it is surely the primary factor here. Due to it, boating companies are suffering, consumer spending is down, and so are our ad pages. “

Also according to Folio, a survey of the largest boat dealers in Connecticut conducted by the Marine Retailers Association of America found that sales of boats costing $100,000 or more had fallen 93%, from $7.879 million in 1990 to $ 545,000 for the same period in 1991.

That’s a drop of from 78 or so boats to about four in a single year.

Nationwide, the study determined, more than 19,000 people had been put out of work at boat-making plants.

Ultimately, Congress repealed the tax.

Yes, the 1991 boat-tax fiasco is an extreme example, but it is sheer folly to believe people’s online purchasing behavior will be unaffected by new sales taxes.

When people buy online or from a catalog, they invariably have a subconscious price threshold over which they will back out of the purchase. This is why setting shipping-and-handling costs can be agonizing.

For those who don’t know, shipping-and-handling charges aren’t the actual cost of shipping and handling. They’re a revenue stream marketers fiddle with in an attempt to create the highest perception of value in would-be customers’ minds.

Free shipping isn’t really free shipping. It’s a sales pitch, the margin-eating cost of which will hopefully be made up in sales volume.

Adding a sales tax to online purchases will most certainly lower would-be customers’ perceptions of the value of those exchanges and depress sales.

Also, while Internet-sales-tax proponents always bemoan the supposed revenue losses from merchants selling into their states from outside their borders, they never seem to consider the advantages a sales-tax-free Internet offers mail-order firms within their borders.

If mail-order firms are forced to begin charging out-of-state customers sales taxes, purchases from those customers will fall.

Then there are the complications of tracking, collecting and paying out-of-state sales taxes, which would cripple some small businesses.

“It would be a nightmare,” said Karin Baker, owner of Woburn, MA-based Beer & Wine Hobby. “Each state has its own requirements as to what’s taxable.”

For example, Baker said, most of the beer-, wine- and cheese-making kits she sells are sales-tax free in Massachusetts—that is, as long as she doesn’t include bottle caps or straining bags (used to steep grains and boil hops). If she includes caps and/or bags, the kits become non-food and are subject to tax.

So her home state sales taxes alone already complicate her local kit sales. Baker said that rather than tracking and adhering to sales tax laws in all 50 states, she would close her business’s doors.

“Because of the amount of paperwork involved in meeting each state’s requirements, it just wouldn’t be worth it,” she said, adding that local sales wouldn’t be enough to keep her business afloat.

How’s that for avoidance behavior? If enough small business owners draw the same conclusion as Baker, the job and state-revenue losses resulting from imposing sales taxes on purchases made out of state could be staggering.

When those businesses disappear, so will the state revenue they produce in the form of taxes on in-state sales, corporate taxes, direct taxes their employees pay, and sales taxes resulting from the purchases their employees make inside the state—gasoline for their commute, for example—that they’d make fewer of without their jobs.

Moreover, those job losses would affect those who can least afford to be unemployed, such as warehouse workers, manufacturing employees and customer-service reps.

So much for socking it to the affluent.