's Amazing Tax Break's Amazing Tax Break's Amazing Tax Break

Commentary about business and finance.
Dec. 29 1998 6:40 PM's Amazing Tax Break

A couple of days ago, annoyed with because 10 days had passed since I placed an order and it still hadn't been shipped yet, I canceled that order and went (in the virtual sense) to to buy the set of books I wanted. I placed the books in my virtual shopping cart and got to the end of the checkout line, but when I arrived there I discovered that my New York address meant that I was going to have to pay the 8.25-percent state sales tax on any orders from the site. Since charges sales tax only to residents of the state of Washington, I canceled my order and returned to Jeff Bezos' site, chastened. Amazon ended up getting my order, despite its inferior service, because I was able to practice tax evasion while buying there.


A story with an obvious moral, to be sure, but just because the moral is obvious doesn't mean that it's unimportant. In fact, in the glorious hubbub about the inevitable triumph of e-commerce, too little attention has been paid to the impact of tax-free purchasing on the demand for buying goods over the Internet. We've heard a lot of talk about how online retailing allows sellers to deliver goods more cheaply and efficiently than in the offline world. But one of the key reasons why sellers can deliver goods more cheaply is that almost without exception they're getting a price break of anywhere from 5 percent to 8 percent depending on where the buyer is. And given how dubious these e-commerce business models look even with the absence of sales tax--companies losing more money, not less, every quarter--what will happen when the preposterous three-year moratorium on Internet taxation ends?

That's an especially interesting question because all the evidence suggests that many online shoppers are there not because of the convenience, but because of the cheap prices. One recent much-cited study by Chicago economics professor Austan Goolsbee suggested that Internet sales would drop by 30 percent if sales tax were charged. If you add together sales tax with shipping costs, after all, most books at the online web sites would be as expensive, or nearly so, as they are in a real book store. And when you shop at a real bookstore you don't have to wait three days to read the book when you buy it. (People who talk about how quick it is to shop online always seem to omit the part about waiting for the product to arrive.)

Most Americans don't have to pay any Internet tax because of the three-year moratorium pushed through in October. (Slate's Gist explored the issues involved in Internet taxation back when the moratorium was first introduced in Congress.) The moratorium was supposedly intended to protect a nascent industry, and perhaps to lay the groundwork for a national sales tax to replace what's inevitably called the current "hodgepodge" of state taxes. But singling out the Internet for what's effectively a subsidy is exactly the kind of government planning for which everyone now excoriates Japan's MITI. Giving companies a competitive price advantage for no reason other than that the Internet is new is an excellent recipe for ensuring that they'll never really figure out how to compete. Of course, all these companies are counting on that moratorium being extended indefinitely. But if e-commerce becomes as big as everyone says it will, there's no way states will be able to survive without taxing it.

The supposed impossibility of collecting individual state taxes is, on the face of it, ridiculous., for instance, collects state taxes from citizens of New York, New Jersey, and Virginia (New York and New Jersey are where B&N's corporate headquarters are, Virginia I still haven't figured out). Would it really be that hard to collect from citizens of the other states?

What's especially screwed-up about the current system is that it actually helps pick winners and losers among the e-commerce players, besides giving a big boost to all the e-commerce people. In retailing, 5 percent to 8 percent is a huge difference, which means that Barnes and Noble is at a serious competitive disadvantage compared to Amazon when it comes to someone like me. And I'd be surprised if New York didn't account for a disproportionate number of Internet bookbuyers.

Tax loopholes are always bad ideas. They function as subsidies, distorting the ability of price to convey information about demand and making everything much less efficient than it should be. The Internet Tax Freedom Act may be law, but it's bad law. E-commerce is for real, but it needs to flourish without subsidies if it's to be really for real.