The real reason Congress wants to tax your online purchases

Donna Anderson

By all reports, sometime within the next 16 months Congress will pass a bill that puts an end to tax-free Internet sales, requiring online vendors to collect sales tax, just like the brick-and-mortar stores do. Their reasoning for this legislation, that states are losing tax revenue, sounds logical enough. But when you take a closer look, you might as well be looking through a piece of Swiss cheese.

Let’s assume our average Jane Doe has $1,000 to spend on Christmas presents this year. If she goes to her local shopping center she can purchase $930 worth of goods for her $1,000. The state she lives in gets the other $70. But, if Jane spends her $1,000 online she can purchase $70 worth of additional merchandise because the state’s not dinging her for taxes.

So far, it looks like Congress is right. The state just lost 70 bucks to an online retailer.

However, someone is going to have to deliver those packages to Ms. Doe. And that someone will probably collect a delivery fee from either Ms. Doe or the online retailer. They’ll also have to pay an employee to drive the truck to Ms. Doe’s house.

That employee will have to pay state income taxes on his earnings at the end of the year, earnings he wouldn’t have had if Ms. Doe and others like here weren’t shopping online. Heck, in today’s economy, he might not even have a job if it weren’t for online shoppers. The delivery company will also be paying state taxes, highway taxes and gasoline taxes, which they wouldn’t have had to pay had Ms. Doe not been shopping online.

All in all, the state is probably making more money off of all of these combined taxes than they would if they were collecting their standard seven or eight percent per sale.

An even greater myth that Congress is trying to pass off as fact is the idea that this new sales tax could raise up to $23 billion in new revenue each year. Ms. Doe has only $1,000 regardless of where she spends it. An extra $70 doesn’t magically appear in her checkbook if she shops online. The money is finite and as we’ve already seen, eventually it ends up in the pockets of government, no matter where Ms. Doe spends her money.

But let’s take it a step further and see just exactly why Congress is so hot on this online sales tax issue.

Brick-and-mortar retailers who collect that sales tax don’t get to keep it, they’re acting as tax collectors for the government. If you have a large business this record keeping can be a real headache. Back in the 1930s, Ohio and Colorado were the first two states to offer vendors a compensation incentive, allowing them to keep a portion of the sales taxes they collected as compensation for the extra work load.

Over the years, other states stepped up and began offering this incentive to their vendors. Of the 26 states that provide compensation, figures range from $1,000 per year to more than $240,000.

The states offering these incentives refer to this as lost revenue or leakage, but it’s not really “lost” because they never had it to begin with. It’s simply money that they know is out there which they can’t get their hands on. So, to them, it is lost revenue, and they want to make it up by taxing online sales.

Along the way, states also began offering tax rebates or refunds to entice businesses and corporations who were looking to expand into other states. Some allow retailers to keep a substantial portion of the sales tax they collect and others offer interest-free loans to help with construction costs. And here’s where it starts to get interesting.

In a 2008 document titled, “Skimming the Sales Tax: How Wal-Mart and Other Big Retailers (Legally) Keep a Cut of the Taxes We Pay on Everyday Purchases”, estimates that, at that time, Walmart was pocketing more than $73 million a year in sales tax revenues.

“We estimate that Wal-Mart collects about $60 million a year in retailer compensation in the 26 states that provide those payments. The highest amounts are in Missouri ($10 million), Colorado ($9 million), Illinois ($8.5 million) and Texas ($7.5 million). In a few states, Wal-Mart by itself accounts for more than 10 percent of the total amount paid out in retailer compensation. In Missouri, Wal-Mart’s estimated share is 25 percent.”

“We find that over the past decade WalMart projects have been given about $130 million in such subsidies, or an average of about $13 million a year. Combining retailer compensation and subsidies, we find that Wal-Mart accounts for the diversion of about $73 million in state or local sales tax revenue each year.”

As the legislation looks right now, sellers who make less than $500,000 in total remote sales a year will be exempt from the online sales tax. And if you put two and two together you can probably see where this is going. Sites like Ebay, and most important,, are about to be hit by the tax man. And who’s leading the charge? Walmart.

The Seattle Times says, “Led by Walmart, traditional retailers mounted a campaign last year to end what they call Amazon’s tax loophole, saying it gives the Internet giant an unfair price advantage of 5 to 10 percent over local merchants.”

They also say, “State and local governments also came to see taxing online sales as a necessary revenue stream in a tough economy,” but we’ve already seen how ridiculous this statement is. Again, $1,000 is $1,000 is $1,000, and no matter where you spend it it’s going to end up in some senator’s pocket.

In 2011 Amazon’s sales grew 41% to $48.1 billion. At the same time, Wal-Mart’s sales increased only 1.5% to $264.2 billion. And just five short years ago only about 25% of Wal-Mart customers shopped at Amazon but in 2011 that number rose to 50%.

Wal-Mart, looking for a way to thwart the competition, spent more that $7.8 million on lobbying efforts in 2011, the most it’s ever spent, and according to Republican Congressman Steve Womack of Arkansas who authored the proposed legislation, they’re one of the prime movers behind the bill. Suprisingly, Womack also had this to say:

“Right now, an online seller has an unfair advantage. How many small-business obituaries do we have to read before we do something. If something affects Wal-Mart, it affects me and it affects jobs in my district ”

Apparently Congressman Womack has a very short memory. How many small-business obituaries did we have to read every time Wal-Mart moved in and took over another town? How many jobs were lost, with each new Wal-mart location? There are small towns across the U.S. whose entire economic infrastructures were wiped out when Wal-Mart moved in, all small local business systematically devestated, but the local government officials made out just fine.

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