The moratorium on internet taxes expiring this fall has sparked a great deal of debate. Michigan Governor John Engler reignited the issue this past week when he said creating some form of sales tax on online purchases would be a high priority as the chairman of the National Governors' Association.
State governments look with covetous eyes on the potential revenue they could receive. That is why Engler and other governors are pushing for congressional authorization to form a compact that would tax goods at the buyer's location. This proposal has many serious flaws.
The justification for taxing the internet is that because customers of online businesses have an unfair advantage over those at "brick and mortar" establishments. The low sales taxes that most consumers of traditional businesses pay offset the cost of shipping that e-commerce consumers must pay, allowing online stores to compete with local businesses. More important, online businesses do not place the same burden on public services (which are funded by sales taxes) as brick-and-mortar businesses do. Rather than asking the government to hinder online businesses, established companies should focus on improving their business and profits.
States see online purchases as a loophole that lets a small amount of money slip through their increasingly large fingers. But money should not be seized simply because it is changing hands.
If the federal government interferes by creating a de facto national sales tax, it will undercut important tax competition between the states. It could drive online businesses across the border to Canada or Mexico. Fleeing businesses would cost every level of government some tax revenue.
The multi-state compact could also present a problem. Not every state has a sales tax. If those states do not join or enforce a compact, business would flow from Michigan and other states to the tax-free zones.
It is important that our state and congressional representatives look at the long-term effects of spreading taxes rather than finding a new source of revenue to cover pay raises and budget shortfalls.
This commentary originally appeared in the Detroit News.