Internet Taxes – New Highway for Expansion of Federal Power

When Amazon.com opened in 1995, it offered numerous advantages to consumers. These advantages included the ability to purchase products without leaving home, and an exemption from state sales tax. Of course, the exemption existed due to the way most state tax laws were worded: only businesses with a physical presence in the state were taxed. Although many states have attempted to close their loopholes, businesses from outside the states selling products into the states remain immune. Congress now wants to pass a bill which would address this tax issue.

The Marketplace Fairness Act (MFA) would allow states to collect sales taxes from online retailers which are located outside the state. The MFA would exempt businesses which make less than $1 million annually in online sales from its provisions. The MFA exemption is a concession to small businesses which would be hindered by such artificial price increases. Given that the Republican Party opposes most taxes, the MFA is receiving a surprising amount of bi-partisan support. MFA proponents claim that new taxes are not being created, but that old taxes are being enforced. The central idea behind the MFA is that physical retail stores are being hammered by online retail stores and that taxing online businesses would restore fairness by increasing prices on products from online businesses.

The MFA is a textbook example of politicians manipulating the American tax code. The purpose of the MFA is to preserve physical retail stores. Obviously Congress cannot simply mandate Americans to shop in physical stores rather than go online, but Congress can levy taxes which would affect prices. These price changes would either make physical store prices more attractive or at least make online and store prices the same. The tax code has hundreds of similar provisions, each designed to encourage Americans to act in a certain way. Whether it is marriage, purchasing a house, or buying hybrid cars, Congress subtly pushes citizens into making certain decisions. The use of the tax code as a social engineering device, however, has also made the tax code perplexingly complex.

The use of the tax code as a means to influence social behavior has led to more expansion of federal power, power which violates individual and state rights. The recent Supreme Court case involving Obamacare highlights the danger of the tax code towards individual rights. One of the reasons Chief Justice Roberts could call Obamacare’s individual mandate a tax is that taxes already act like mandates. Mandates can be taxes because our taxes can be mandates. Saying that a tax forces a person to buy from a physical store rather than online sounds absurd, but changing the prices changes the decision-making of the individual. Assuming rationality, the individual will always make the choice that the tax code wants them to make by purchasing the least expensive item.

Proponents of the MFA will say that the status quo influenced individuals into buying from online retails rather than physical stores. The MFA, in the eyes of its supporters, actually restores the freedom of choice by applying the tax to everyone rather than disadvantaging one method of commerce over another.

The problem is that online retail has advantages that physical stores do not and these advantages will naturally cause consumers to favor shopping from the internet over walking into an actual store. Being able to buy an item anywhere at any time is a tremendous boon to the consumer. Being able to compare prices at multiple stores without wasting time and gas is also a significant advantage that online retail enjoys over physical stores. Tinkering with taxes is a weak attempt to prop up a model of business that is going extinct. Granted, many consumers will often walk into a store, check out the item, than purchase online because the product online is cheaper. However, this typically happens when the business in question operates both a brick and mortar store as well as a website; the price difference in that situation comes not from taxes, but the businesses own decision to promote the same items online at a cheaper price.