States To Push Internet Sales Tax

Are the days of tax-free toothpaste from Amazon coming to an end? Tax-free books? Tax-free computer equipment from NewEgg? It is almost too terrible to imagine, but it may be in the works:

Come this fall, 13 states will start encouraging — though not demanding — that online businesses collect sales taxes just as Main Street stores are required to do, and more states are considering joining the effort.

Right now, buyers are expected to pay sales taxes on Internet purchases themselves directly to the state when they pay their income taxes. But it's not widely enforced, and states say it costs them upwards of $15 billion a year in lost revenues, collectively.

"Taxes that it was difficult to collect before will now be collected. And consumers will pay that," said David Quam at the National Governors Association, helping lead the five-year effort that brought together state revenue officials, legislators and business leaders.

A 1992 U.S. Supreme Court ruling forbids states from forcing a business to collect their sales taxes unless the company has a physical presence in the affected state. The court noted the dizzying array of tax jurisdictions and widely varying definitions of taxable goods, such as fast food versus groceries.

Well I don't think "encouraging" is going to have much effect. Would you pay your income tax if you were encouraged but not required to do so? Unlikely.

I am sympathetic to the underlying problem of cross-border taxation. Having lived in Massachusetts and watched people haul kitchen appliances across the border from New Hampshire, it seems clear that this is not a new problem. The scale, however, is so much bigger. And I can not think of a good fundamental economic or moral argument for why purchasers ought to be able to avoid the sales tax of both their own state and the seller's state.

There are plenty of good practical economic and administrative arguments, however, for why this may be a doomed project without broader changes in the way we tax. Whether it be a shift to a federal sales tax, a VAT system, or some other scenario my ignorance of tax law is overlooking, I don't know. But I don't think this is going to cut it:

To be accepted as part of the project, a state must change its tax laws to match up with the others. So far, 13 states have come far enough to be part of the project. Five more are approved to join within the next few years, and others have made partial steps.

The process wasn't easy. Among the issues to be answered: If candy is taxed but food isn't, what is candy? And what is food? Is a Twix cookie bar candy or food?

The solution: anything with flour is food, not candy.

I can't wait to see Amazon re-defining its categories in response to this. Books, DVDs, Music, Food with Flour, Candy without Flour, etc. Perhaps they will come up with a "search by ingredient" along the lines of their "search this book" program.