For the past 12 years, there have been threats, attempts, etc. to add an Internet sales tax to all goods purchased online. It's been a growing field of sales that has not been exploited for the taxes these sales could generate. This move on paper looks like it would be good; however, along with the pros we must consider the consequences of taxing a growing part of the American economy and the serious problems that would come with that.
Online sales account for 3 percent of the total sales of goods in America. That's over $200 billion a year. A tax of just 1 percent would fund schools, road projects or any one of a number of projects a state needs to be done. If a tax is ever imposed, it would be more likely in the neighborhood of 3-6 percent. The growth of Internet-based sales continues on an upward trend as more secure sites become available and credit card information is protected by vendors. There seems to be no end in sight to the growth of the Internet sales numbers.
It is a tried and true fact that the taxing of any activity leads to a decrease in that activity. Still relatively new, there are those whose only reason for purchasing online is the savings of the sales tax they would have spent at a local store. Others shop online because what they order isn't available locally. Still others just don't want to fight the crowds and choose to order online out of convenience. Just as the states of New York and California learned the hard way as they added one more increase to the taxes of the wealthiest residents to meet a budget shortfall, the exodus of the wealthy out of these states not only caused the collected taxes to decrease, the decrease was so sharp that the states aren't even collecting what they were before they decided to increase the taxes. Taxing an activity leads to a decrease in the activity taxed. Economically speaking, if there are people spending money online, $200 billion dollars worth, let them.
One of the major problems with taxing the Internet sales is where would the funds go to? To the state where the online store is incorporated? To the state where the merchandise is shipped? To the state where the Internet provider is located? There is no precedent for this type of situation as the Internet providers route transactions through servers in many states, so does each state get a percentage? How much of a percentage is given to each state? Getting a firm answer on this would have to work its way through the governments of all states involved and possibly the federal government as well. So while the revenue generated looks good, the activity would decrease online spending, which would decrease the revenue generated. It's a vicious cycle that won't end.
Pros vs. Cons
When spending in the USA increases by a margin of just 1 percent, that means we are experiencing positive growth. The taxation of the Internet sales would be a drop in the bucket for government revenues compared to the totality of spending occurring right now. The slowdown in online sales that would naturally occur should taxation begin would have a domino effect on spending elsewhere. While it's true some states won't benefit, some will as even if the sales taxes aren't paid, it takes employees to handle the shipping, receiving and ordering processes and contributes to payroll taxes both federally and to the state. Hopefully we can all take a lesson from New York and California and find other ways to fund our public projects.
David Roberts has been writing since 1985. He has published for various websites including online business news publications. He has over 11 years experience in tax preparation and small business consultation. He is also a Certified Fraud Examiner. He received a Master of Business Administration from Florida Metropolitan University in 2005.