It?s Time for Internet Sales Tax (Jeff Hankins Commentary)

As much as I hate to say it, the time has likely come for a sales tax on Internet retail transactions.

I was adamantly opposed to this for years, especially while Internet commerce was just getting off the ground. Republican Gov. Mike Huckabee’s support of Internet taxation troubled me greatly a few years ago, when he was insisting that state and local revenues were suffering.

The reality today, now that Internet sales during the holidays alone topped $23 billion, is that there is definitely an impact on state revenues and local retailers. People are willing to shop online and then pay the shipping and handling fees. Lower online costs for the products and the absence of sales tax makes the overall pricing a wash. In-store service and expertise is exchanged for home shopping convenience — theoretically anyway.

Online shopping will only continue to grow as Web sites become more sophisticated and consumers grow more comfortable with the safety of online transactions.

A sales tax on Internet sales would have to be implemented at the federal level, and admittedly that’s a big downside. With so many different rates and exemptions, it would be impossible for small Web-site operators to manage and implement. I suppose transaction firms like Paypal could jump in as a provider, but it would have to recoup the expenses for management and collections.

The average sales tax rate among the 46 states that have one and the District of Columbia is 5.25 percent. The highest is 7.25 percent in California and the lowest is 2.9 percent in Colorado. Perhaps the national sales tax rate for Internet sales could be 3 percent, which during the holidays alone would have produced $690 million in tax revenue to be distributed among the states based on the residence of the person making the transaction.

The funds could be specifically earmarked for broadband infrastructure at schools and colleges or some other meaningful advancement instead of pouring the money into new programs that lead to nothing. The states, of course, will want total control of the funds.

However, I absolutely do not support taxation on Internet connection services. We can’t do to the Internet what we did with telephone, cable, cell phones, utilities and the like by setting up convenient access fees that local municipalities and states love to raise as hidden tax increases.

The United States is already falling behind in broadband access compared with other developed countries, and we need to keep the Internet as affordable as possible while working toward access saturation.

Not Just the Internet

The Internet is actually the second wave of retail commerce that has impacted local tax revenues. Catalog sales were the first, and that situation has been minimized somewhat with laws related to businesses that have a presence in the state from which an item is ordered.

On one day in November, my wife received 13 catalogs in the mail. For kicks, we collected them to see how many different catalog retailers were soliciting us, and the last count was nearly 50. About half of them are pure junk (at least in my view), and the other half are from well-known operators with quality merchandise to offer. (Incidentally, I’m sure we have Little Rock direct marketing provider Acxiom Corp. to thank for being on all those mailing lists.)

Most of the catalog operators don’t have a retail store presence in Arkansas, so most of them don’t have to charge sales tax. That’s an unfair advantage to companies that don’t have a presence in Arkansas, which means they are doing very little for the local economies.

We can’t stop the Internet and catalog shopping trends, but we can work to give local retailers a level playing field. The issue deserves more debate and action.

(Jeff Hankins can be reached via e-mail at [email protected].)