Beyond the I-Tax Moratorium

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The moratorium on new taxes on Internet transactions is set to expire Oct. 21, and pending legislation before Congress would extend the moratorium for five more years.

The direct marketing community, while generally supportive of the moratorium, has been remarkably tepid in its support of the extension. Worse yet, there has been too little expressed opposition to the alternative legislation promoting a unified system to collect sales taxes.

Direct marketers need to cut through clouded and stale thinking, and industry representatives need to say boldly what is not being said: State and local sales taxes are obsolete. And they are not only obsolete, they are anti-consumer, anti-taxpayer, anti-small business and anti-commerce in general.

H.R. 1552, the Internet Non-Discrimination Act introduced by Rep. Christopher Cox, R-CA, sailed through the House Judiciary subcommittee markup. The bill would prohibit new taxes on Internet transactions, but it also would hamper development of a "uniform" and "simplified" system, proposed in alternative legislation, whereby the 7,600 states, counties and cities in America may make sellers collect sales taxes or buyers pay use taxes on remote purchases.

Any simplified or unified sales tax system for the 7,600 taxing jurisdictions will add more burdens to interstate commerce than exist now. Small businesses inevitably would suffer more than large businesses under such a scheme. These added burdens likely would have an anti-competitive effect.

Also, it is important to recognize the flawed premises on which proponents of a unified sales tax system rely. Two primary arguments in support of a unified sales tax system are that states need revenues from sales taxes and that a ban on Internet sales taxes would discriminate against purely brick-and-mortar merchants. But both premises are flawed.

That not all states and localities have a sales tax is prima-facie evidence that they are not necessary. Other facts belie the claims that states need this source of revenue in particular. State tax revenues increased more than 45 percent from 1992 to 1998, but spending went up as well. The increase in spending doubled the revenue increases in the year 2000 alone. No honest observer can deny that there is at least some wasteful government spending. Woe to the business executive who increases his company's spending more than its revenues without justifying those increases. So why not hold state officials accountable for their claims that they cannot at least replace one form of revenue with another?

The second faulty premise is that sales taxes discriminate against brick-and-mortar merchants. That falls into the category of two wrongs don't make a right. Sales taxes caught on during the Depression. States used local merchants as disguised tax collectors. Interstate direct marketing was in its relative infancy. Given the growth of interstate commerce since then, that system has grown obsolete because it was not designed for the volume or forms of interstate commerce we have now. The wrong created by taxing local sales is not cured by burdening interstate commerce with centralized, uniform taxes based on arbitrary standards of nexus and taxable presence.

Also, consider that any sales and use tax system is difficult to enforce and practically encourages tax avoidance. How many people actually pay use taxes? Sales taxes are anti-taxpayer because they are deceptive, as opposed to other forms of taxes in which people calculate how much they pay. Because sales taxes are no longer deductible from federal income taxes, who actually knows how much they pay in sales taxes each year?

The direct marketing industry needs to promote the real solution, which a permanent moratorium on Internet taxes would encourage. States and localities should stop hiding behind merchants and abolish sales taxes for all.

The elimination of this obsolete system of generating revenues will force use of modernized revenue sources and may even result in streamlined and more efficient state spending. States that refuse to compete in the new economy and continue with antiquated tax systems will suffer. Unfortunately, many shortsighted (or perhaps otherwise motivated) state officials would rather develop a contorted solution that burdens interstate commerce in the new economy -- which ultimately costs consumers more money -- than risk exposing their budgets to some critical scrutiny.

Of all the interest groups supporting the Internet tax moratorium, the direct marketing industry should be out front as the loudest because not only the industry would benefit, but its customers would as well.


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