Monday, November 5, 2007

Is The Ban on Internet Taxes a Subsidy?

Economist Dean Baker has written an article claiming that Amazon owes its success to government subsidies.

Amazon reported higher than expected third quarter profits and a 41 percent increase in revenue, a good enough showing to push its stock price back to tech bubble peaks. One item missing from the accounts of Amazon's good news is the continuing subsidy that it gets from taxpayers.

While most stores must charge customers state sales tax, Amazon and other Internet retailers enjoy a special subsidy. They need not charge sales tax except in the states where they have a physical presence. (I believe that list is Washington and Utah.) That's great news for Amazon, if we assume that state sales taxes would average 4 percent on annual sales of $15 billion a year, then taxpayers are subsidizing Amazon to the tune of $600 million a year, more than its annual profits.
Rather than try to come up with something intelligible to say to this nonsense, I will merely quote TechDirt, which has published a nice response.
Some states don't have sales taxes at all, but no one would consider that a taxpayer subsidy. My local Wal-Mart benefits from a variety of state and local government services here in the St. Louis area, such as police and fire protection, and roads and other infrastructure. At least in part, sales taxes go to cover the costs of providing those services. Amazon uses few if any services from state or local governments in Missouri, so it's hard to see anything unfair about the fact that it doesn't have to collect sales taxes here.

On the other side of the ledger, sales tax collection would be far more burdensome to Internet-based businesses than to their brick-and-mortar competitors. A mom-and-pop retail store only has to learn about the tax rules in one jurisdiction. Most likely, there's just one tax rate, one set of rules about which goods are taxable at that rate, and one set of reporting requirements. In contrast, a small e-commerce site would have to familiarize itself with the rules in thousands of different jurisdictions. The state of Missouri, for example, allows municipal governments to tack a variety of local taxes onto the state sales tax. As a result, the tax rate varies from city to city. Even worse, different states have different rules about which goods and services are taxable. Missouri, for example, exempts custom software (but not boxed software), farm equipment, and medical grade oxygen, among other things. Colorado has exemptions for bingo equipment, cigarettes, food, fuel and oil, machinery and machine tools, newsprint, precious metal bullion and coins, and more. Each of the other 40-some states with sales taxes have their own lists of what's taxable. Many states exempt food and clothing from taxes, but the precise definitions of "food" and "clothing" varies from state to state. For example, in Wyoming, bagels are considered tax-exempt food unless they're sold with cream cheese and a knife, in which case they become taxable "prepared foods."


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