If the reaction to my recent piece on taxation on the Internet (or rather the lack thereof) is any indication, maybe Amazon.com’s stock is not overvalued. My criticism of the recently-passed three-year moratorium on taxes on the Internet provoked a flood of e-mails, many of them from readers convinced I was either a shill for Barnes and Noble or just too tax-happy for my own good (and the good of everyone else, too). On the other hand, a number of readers echoed my skepticism about the virtues of exempting e-commerce from taxation, and most seemed to think that in the absence of a national sales tax, levying taxes according to destination was the logical way to deal with the problem.
In any case, readers’ criticisms of the piece (and there were so many of them) were acute. Here then, is an attempt to answer some of those criticisms, to clarify the original argument, and to retract what was patently wrong.
1. I like Amazon.com as a Web site. Although the piece was headlined “Amazon.com’s amazing tax break,” and although it began with a story about me choosing to order books (which still haven’t arrived, by the way) from Amazon rather than Barnes and Noble because B&N charges sales tax in New York, it wasn’t intended as a company-specific critique. On the contrary, barnesandnoble.com benefits almost as much as Amazon does from the absence of sales taxes, and the distorting impact of the sales-tax exemption applies to e-commerce across the board. Amazon is just the most visible e-commerce company, and the question of what its losses would be if it weren’t getting this tax break is an especially interesting one in light of its inflated stock price. But I don’t like barnesandnoble.com any better than Amazon, and have ordered happily from Jeff Bezos’ baby in the past.
2. More than a few people pointed out that companies must charge sales taxes only in states where they have a “nexus,” or a place where face-to-face business is transacted. But Barnes and Noble has stores all over the country, and charges taxes only to residents of N.Y., N.J., and Va. Amazon.com, meanwhile, actually transacts no business face-to-face with its customers–you can’t drop by the office and buy the book–but still has to charge sales tax in Washington. So the nexus rule doesn’t apply as we might expect. (In the case of B&N, that’s because the company defines its Internet site as a distinct subsidiary.)
3. Although the laws are complicated, Congress would need to change the nexus rule to allow states to charge sales taxes, since Congress has authority over interstate commerce. That could be averted by a single national tax, but letting the states charge would probably work just as well. The logical way to levy the tax would be on the basis of where the order is going.
4. Of course, some (all?) states already levy such a tax, in the form of a “use tax,” which theoretically you’re supposed to pay on out-of-state purchases when you file your tax return. In the absence of any enforcement mechanism and any way of tracking those purchases, the use tax is ill-equipped to deal with a boom in e-commerce, although rest assured that I would never attempt to evade my obligations.
5. Yes, mail-order companies reap the same benefits from sales-tax exemption. But all that means is that all my arguments about taxing Internet commerce apply to mail-order companies, too. The only difference is that no one is talking about mail-order revolutionizing the entire U.S. economy. E-commerce is currently a minuscule part of American retail sales. But if it becomes what its proponents think it will, then some mechanism of taxation is necessary. In any case, the idea of exempting certain kinds of companies from taxation is as theoretically flawed in the case of mail-order companies as in the case of Internet companies.
6. The real problem, though, may not be the theoretical flaws but rather the practical ones. A number of readers argued compellingly that it was just too difficult to expect companies to collect and remit sales taxes for all 50 states. Perhaps. But Williams-Sonoma, to take one example, charges sales tax to customers (on all purchases except food) in 37 states and the District of Columbia, charges sales tax on deliveries to customers in 21 of those states (and D.C.), and charges state and local sales taxes on food to customers in 12 states and two cities. If Williams-Sonoma can do that, so can Internet companies. Multinationals usually pay corporate taxes in a variety of locales, as well, and don’t seem to find it beyond their ability to do so.
7. Of course, if you feel that all taxation is a form of theft, then the Internet tax moratorium is better than nothing. I don’t feel this way, and think that tax breaks are in fact subsidies. Insofar as the three-year moratorium will make it harder to levy taxes on e-commerce, that’s another reason why it’s a bad idea.
8. Apologies to everyone who was offended by me shooting my mouth off about New Yorkers probably making up a disproportionate number of Internet book-buyers. I was assuming that Internet penetration is higher on the coasts, and that New York is, as they say, “Book Country.” But since I have no idea what the real numbers are, it was, shall we say, stupid to make the comment.
9. The point of that comment, in any case, was that any e-commerce company should locate itself in a state with a small population and, ideally, no sales tax. Companies are already chartered in Delaware. Soon, perhaps, all Net companies will have headquarters there as well.
Let the flood of e-mails continue!