The Cyber Tax: Right Nail but Wrong Hammer
“In testimony before the House Judiciary Committee in Washington Wednesday, Noblesville Republican State Senator Luke Kenley said Congress should allow states to collect sales tax from all Internet retailers, regardless of whether they have a physical presence in the state. — Indiana Public Media, Dec. 1, 2011
When all you think you have is a hammer, every problem looks like a nail. That cliché comes to mind when reading reports on a proposal being pushed by a leading state senator to address the disparity in the collection of sales tax.
Everything I sell can be purchased online from the biggest national sellers to the smallest cyber entrepreneur. So I understand in a quite personal way the gross inequality in the sales-tax treatment of retailers maintaining a physical presence compared with those maintaining only a cyber presence.
It is a major problem that contributes to the loss of millions of dollars of business.
The senator, hammer in hand, can only see the $77 million being lost annually to state coffers. Those of us with experience in both business and government, though, aren’t eager to find more money for the state to spend. The loss of sales-tax revenue is of no consequence to me as a citizen.
A friend has a coffee cup with another cliché pertinent to this discussion. “Government: If you think the problems we create are bad, just wait until you see our solutions.”
Along that line, Lawrence Reed of the Foundation for Economic Education may have a solution for both the senator and me.The problem, Reed notes, is not hard-to-tax employers. Rather, it is a convoluted and incomprehensible sales-tax system that defies all logic, one rife with favoritism and special deals and shot through with social engineering.
It encourages the very disparate treatment that is the cause of our dilemma. Some examples:
- If you buy a ham sandwich you pay sales tax.
- If you buy some ham and some bread you don’t pay sales tax.
- If I sell my labor as a product delivery my customer pays sales tax on the service.
- If an attorney sells their labor as legal advice their client doesn’t pay sales tax on the service.
- If you buy electricity or water, products vital to your well-being, you pay the tax.
- If you buy medication or food, products vital to your well-being, you don’t.
- If you buy a hammer to fix your roof you pay extra.
- If you buy the exact same hammer, but as a church member to fix the church roof, you don’t pay extra.
Does any of this make sense? It doesn’t to me — not as a business owner, not as a consumer and certainly not as a citizen who expects my government to treat me justly.
The senator’s solution, though, is to augment his role as a state revenue collector, trapping those cyber-businesses not currently in the system’s arcane net, to add another line to the above exceptions.
That’s a solution that would only occur to someone with a lot of faith in government.
The rest of us are unrepresented in this debate. Given the chance, we would suggest that the list of over-taxed entrepreneurs and businesses, whether they be those of us on Main Street or those on the Internet, is already too long. It won’t help the economy to add to it.
What the senator could do instead is dramatically lower the sales-tax rate, applying it to everyone on all products and services — without exception or exemption.
Tax disparity is a problem whose time has come to solve. Treating online retailers as badly as Main Street retailers is not the way to do it.
Ryan Cummins, an adjunct scholar of the Indiana Policy Review Foundation and the owner of a retail business, was chairman of the finance committee on the Terre Haute Common Council. Contact him at firstname.lastname@example.org.