May 25, 2005

WI Committee Rejects Internet Sales Tax

The Wisconsin Joint Finance Committee rejected Governor Jim Doyle's proposal to add a 5% sales tax to "music, movies, books and art downloaded from the Internet." I'm sure they figured something out, but enforcing such a tax on the state level seems difficult.

The governor's office tried to make the point that local small businesses are disadvantaged because a customer must pay sales tax on goods that they purchase in a physical store. The idea of streamlining taxes to reduce interstate tax fighting is picking up steam.

This, however, strikes me as different. iTunes, for example provides a very different consumer experience from shopping in a record store. In other words, it makes sense that, say, Wisconsin on Minnesota or Iowa would want to work together to bring their sales tax structures into harmony, it is less clear that states should try to do the same with internet sales. With regard to bordering states, it seems like a good idea to me because that way businesses are on a more level playing-field to compete based on service and quality of product, and not what plot of land they occupy.

But, Jim Doyle wasn't completely out of line. He is correct in noting the change in the market environment and it's potential impact on his state's sales tax base (despite the previously mentioned differences, a good deal is still a good deal). Overtime, I can imagine that the prevalence of internet sales might lead more states to shift away from their reliance on a sales tax to bring in necessary revenue.

Furthermore, internet commerce, though kind of different, is not fundamentally different than "bricks and mortar" commerce, as this policy brief makes clear. So, the solution to this issue is a couple steps away. It seems like, in terms of taxes, the first move to level the playing-field between states. Once that's done, it will become possible to attempt to level the playing-field between mediums.

Update: This article from back in March provides some decent background.

It seems more and more like Doyle's motivation was right--a level playing field for businesses in his state--but he sort of stumbled out of the gate and proposed a policy that would be hard to enforce. Also, if you follow the link to the older article, you'll see that some legislators tried to score some cheap political points by claiming to support e-commerce. I'd argue that online retail would remain a very profitable business regardless of comparable sales tax enforcement. Online merchants would still save a lot on overhead and be able to pass the discounts on to their customers. Catalogue shopping, of course, existed long before the internet came along.


At 5:15 PM, Anonymous squarestater said...

Even as the SSTP picks up momentum, it depends on Congress to pass the right law (ie, the law that says states can do this thing). So that's when the big guns come out to kill the whole thing.

One danger of the SSTP is that "leveling the playing field" and "streamlining" sales taxes begin to be arguments for a national sales tax.

One nice thing is that taxing remote sales would add progressivity to the states' sales taxes but probably not a lot.

At 10:02 AM, Anonymous Graham said...

Your point about the "one danger" is right on. Though, I'd hope that if people see that alternative, they will also realize the costs and regressivity (not to mention harm to local businesses--everywhere).

My hope is that states will realize the problems with over-reliance on a sales tax, and shift their revenue raising methods elsewhere, at least for balance.


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