The Sales Tax Petard

For years, the web-based book seller Amazon.com had not been charging sales tax in states in which it did not have a physical presence such as a store. States do not have legal jurisdiction over enterprises that are not located within their territory, although Amazon and other companies have had relationships with affiliate companies, which makes the concept of a physical presence unclear.

Customers who do not pay a sales tax to the seller are supposed to pay a Ause@ tax that is equivalent to a sales tax, but they rarely do this, due to the absence of enforcement. This proves that most people do not consider a tax on goods to be a moral obligation.

Now the sales-tax-free era is coming to an end. Book store owners had long complained that it was unjust for them to pay sales taxes while web-based sellers were not charging the tax. In California and some other states, the sales tax rate is about ten percent, a substantial difference when the price of a book is high, and the books can be mailed at the low-cost media rate.

The efficient and equitable solution is to abolish the sales tax. Sales taxes are a 19th century antiquated tax not suitable for the global economy of the 21st century. With the abolition of sales taxes, all sellers are on an equal tax playing field. Instead of taxing goods such as books, the states could more efficiently and equitably tap land values and land rent. But politics compels the state governments to subsidize land values, so the state officials did the opposite, applying their sales taxes to Amazon and other web-based sellers. Amazon has stopped fighting the sales tax, and has appeared to surrender to sales-tax pressure, but it is actually making lemonade.

The Amazon company is already taxing goods in several states, including New York and Texas, and will include more states from 2012 thru 2014, including California. Local book sellers are hoping that the taxing of web-based sellers will stop the drain of customers to those sellers. But they may have hoisted themselves with their own petards, as the old Hamlet saying goes. A petard is a small gunpowder bomb, and the saying comes from being blown upward from one=s own bomb that explodes prematurely.

If Amazon has to charge and pay sales taxes even without a store or warehouse in a state, the company has no more reason to avoid such physical presence. Indeed, Amazon is being pushed by the state governments to install distribution centers to generate jobs. These warehouses will provide same-day delivery to customers, at little or no cost to the buyers. If a buyer seeks a particular book, it would save time to order from Amazon rather than go to a book store, with all the bother of driving, parking, and waiting in line. The main reason to go to a book store would be to browse, but one can also browse on a book seller=s web site.

There are three reasons why governments levy sales taxes. The reason is not to collect revenue, since governments could raise revenues from other sources. The first reason for sales taxes is to force the poor to pay taxes. Conservatives want the poor to pay taxes so that they feel the burden of government. The second reason for sales taxes in addition to having other taxes is to split up taxation among many sources to make it difficult for individuals and firms to calculate the total taxes paid. Tax complexity is thus a deliberate government policy. The third reason to impose a sales tax instead of the more efficient land tax is to subsidize landownership, since public goods raise land values unless paid for by land owners.

By becoming landowners in a state, Amazon.com and other firms in effect get a tax rebate from the states. The firms pass the sales tax to customers and suffer some of the tax burden in fewer sales and less profit, but if they own real estate, they can get their money back in the implicit rental that reflects the public services paid for by the customers rather than the firms. Thus the web-based retailers are learning to game the system in their favor.

The losers are the people who buy goods, and have no clue that they are thereby paying a second tax in the form of an excess burden and deadweight loss, and redistributing wealth to the rich in the form of higher land values. Of course real estate owners suffered large losses during and after the Great Recession of 2008, but the upswing of the real estate cycle is now starting, just in time for web-based retailers to cash in under the disguise of providing jobs in warehouses.