Whackamole
The notion of charging sales taxes on all online purchases keeps coming up, and I've been asked to take another whack at it. Okay. First, the latest news: Tennessee is getting ready to tax online purchases. You can read about it in the Memphis Commercial Appeal or The Tennessean, or the Knoxville News Sentinel. Take your pick. They all repeat the same pro-tax spin, and provide less background and depth that you deserve.

I'll just demolish one excerpt from The Tennessean:

University of Tennessee economist Bill Fox told the committee the existing tax setup is costing the state $600 million in lost revenue. Ownership of computers and access to the Internet are both highly correlated to income, Fox said. About 85% of people making $75,000 or more a year have access to the Internet, while only about 25% of those making $20,000 a year or less have such access, he said.

"So we have a tax that is not fairly collected," Fox said, referring to sales taxes that more prosperous Tennesseans avoid by being able to purchase over the Internet. "It is increasingly placing a burden on low-income Tennesseans."

Absurd on two counts.

First, last year, Fox said the state was losing $300 million in sales tax revenue because of ecommerce. Now, all of the sudden, the figure for this year is $600 million. Does anyone really believe online shopping doubled in Tennessee in the last year? It hasn't doubled anywhere. In fact, online shopping remains a tiny fraction of total retail - it's growing fast, but is still only 1.6 percent of the pie. Taxing it will bring in very little revenue.

Second, Fox's argument about fairness is silly. Years of government subsidies and spending have put Internet-connected PCs in virtually every school and library across Tennessee. And more and more workers have access the the Internet at work - which is why online shopping sites see some of their biggest traffic during the typical lunch hour. If you're a Tennessean with money to spend, you can get on the Internet. And if you don't have money to spend, well, the state wasn't getting much sales tax revenue from you anyway, so it hardly matters whether you can get online to shop or not.

I don't have time to deal with all of this foolishness for the 43rd time. Just read my previous posts here, here, here, here, and here.

Happy reading.

UPDATE: Taxing ecommerce purchases by the jurisdiction of the seller, rather than the buyer, would not run afoul of the Commerce Clause, is much more feasible from a practical standpoint, and would be fair because the seller would be collecting tax for the state in which the seller exists and puts demands on tax-funded services. But it would create an environment in which states would race to lower taxes on online shopping, in order to attact those businesses to locate in their state and employ their people. As such, it would not be as big a revenue producer for the states - and would cost some states jobs as dot-com retailers moved to states with zero taxes on ecommerce - and that's why the states don't like it.

I wrote about that a long time ago. In fact, it was the second thing I ever posted on this blog, back on Nov. 30, 2001, the first day I published on this site. Here is the direct link. And here is an excerpt of the piece, which comments on a paper written by Aaron Lukas, trade analyst at the Cato Institute's Center for Trade Policy Studies:

Lukas's essay says that even though e-commerce is a tiny component of consumer spending, "its mere existence serves to inhibit excessive taxation" because politicians "fear that if they raise tax rates too much, consumers can take advantage of low tax rates elsewhere," so online shopping free of new sales taxes will encourage state and local governments to keep overall tax rates at a more reasonable level. As Lukas points out, the states want sellers to collect online sales taxes based on the location of the buyer, which is the reverse of the way things are in the offline world, where sales taxes are collected for the jurisdiction in which the seller is located - in other words, where the sale originates.

"To truly level the playing field, states should instruct Internet-based businesses to collect the local sales tax regardless of where their customers reside," Lukas says, adding that under that type of system, retailers would have only one tax to collect and one revenue agency to deal with, lowering administrative costs. "More importantly, the de facto tax advantage for online sellers would vanish, while healthy tax competition among the states would be strengthened," he adds, commenting, "the latter, of course, is why states immediately dismiss any origin-based proposal as unworkable."

The rest of it is good, too.