The Internet and the Death of the Sales Tax

By Ault, Richard W.; Laband, David N. | Ideas on Liberty, May 2000 | Go to article overview

The Internet and the Death of the Sales Tax


Ault, Richard W., Laband, David N., Ideas on Liberty


The editors of our hometown daily newspaper, the Opelika-Auburn News, recently came out in favor of taxing Internet commerce. While noting, incorrectly, that sales taxes constitute the "largest source of revenues at all levels of government," the editors forecast that Internet sales as a fraction of all sales "can only be expected to grow in the near future" and concluded by asking, "Who knows how much more sales tax revenue could be generated, particularly in about five or 10 years, from online sales? What is already a very healthy economy could become even stronger."

The notion that taxes help make an economy grow stronger is, of course, ludicrous. But the battle over Internet taxation is in full swing. Proponents argue that standard retail stores will lose business and be at a competitive disadvantage if they are taxed and e-commerce is not. This is indisputably correct. Opponents respond that taxation would restrict Internet sales and stunt the economy's growth. There is merit in this argument. In our view, however, what is really important is that in all likelihood, e-commerce will sound the death-knell on sales taxes as currently configured.

Although Wal-Mart is headquartered in Arkansas, patrons of their local Wal-Mart pay sales tax on their purchases at the rate estabfished by the state in which they reside. The sales tax is collected at the point of purchase and paid by the retailer to the state government. Heretofore, the imposition of excise taxes had little influence on retailers' location decisions, because most customers would not find it worthwhile to drive to another state just to save a few cents per dollar in state sales taxes. But the Internet changes this situation dramatically-the retailer no longer has a fixed location, and it is not very costly for the consumer to observe merchandise locally but to purchase over the Internet. The consequences of Internet tax freedom are not hard to imagine. Consumers get a discount on goods bought from a virtual store over the Internet as compared to purchasing the exact same items in a real store. The size of this discount equals the sales tax rate prevailing in their state, minus shipping costs. This realized price/tax savings surely has played a major role in the explosive growth of e-commerce.

Some people believe that there is a natural limit to the proportion of sales (and therefore the lost tax revenues) that can be handled through e-commerce because of the expense or impracticality of shipping certain items and lack of customer access to the Internet. However, we are not convinced that either shipping costs or lack of Internet access will prove to be an impediment to growth in Internet sales. It is only a matter of time before items such as groceries, which are both perishable and expensive to ship relative to their value, will be offered over the Internet. In those states where groceries are subject to sales taxation, grocers will have a financial incentive to restructure the checkout. Customers at a particular store will place their orders over the Internet, and be instructed to pick up their merchandise at their current store. This solves the problem of customers wanting to inspect the merchandise firsthand without having to incur additional shipping costs, while permitting stores to offer customers significant price/tax savings. This also means that Internet shopping will not be limited to customers who have personal access to the Internet. Stores will provide access to all customers. …

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