Low Taxes Aren't A Subsidy

from the logistical-nightmare dept

Economist Dean Baker thinks that Amazon owes its profits to the fact that it doesn't have to collect sales taxes for customers in states where it doesn't have a physical presence. The absence of sales taxes on Internet purchases, he says, is a "subsidy that Amazon gets from taxpayers." This is silly. Some states don't have sales taxes at all, but no one would consider that a taxpayer subsidy. My local Wal-Mart benefits from a variety of state and local government services here in the St. Louis area, such as police and fire protection, and roads and other infrastructure. At least in part, sales taxes go to cover the costs of providing those services. Amazon uses few if any services from state or local governments in Missouri, so it's hard to see anything unfair about the fact that it doesn't have to collect sales taxes here.

On the other side of the ledger, sales tax collection would be far more burdensome to Internet-based businesses than to their brick-and-mortar competitors. A mom-and-pop retail store only has to learn about the tax rules in one jurisdiction. Most likely, there's just one tax rate, one set of rules about which goods are taxable at that rate, and one set of reporting requirements. In contrast, a small e-commerce site would have to familiarize itself with the rules in thousands of different jurisdictions. The state of Missouri, for example, allows municipal governments to tack a variety of local taxes onto the state sales tax. As a result, the tax rate varies from city to city. Even worse, different states have different rules about which goods and services are taxable. Missouri, for example, exempts custom software (but not boxed software), farm equipment, and medical grade oxygen, among other things. Colorado has exemptions for bingo equipment, cigarettes, food, fuel and oil, machinery and machine tools, newsprint, precious metal bullion and coins, and more. Each of the other 40-some states with sales taxes have their own lists of what's taxable. Many states exempt food and clothing from taxes, but the precise definitions of "food" and "clothing" varies from state to state. For example, in Wyoming, bagels are considered tax-exempt food unless they're sold with cream cheese and a knife, in which case they become taxable "prepared foods." Not surprisingly, small online retailers are worried about the administrative burden of complying with so many different requirements. Some states have banded together to create a unified, "streamlined" sales tax system, but e-tailers are skeptical about how much the system can be simplified. Unless states first radically simplify and harmonize their sales tax rules (which might be a good idea anyway), I don't think it's going to be feasible to "streamline" the system enough to make it affordable for small e-tailers.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    no, Oct 26th, 2007 @ 5:51pm

    Fair.

    Here's how I see it.

    I buy a lot of stuff online. I enjoy not having to pay taxes. I do not have children. People with children use more government resources than I ever have or will AND they get tax breaks that I will never get. So I'm already subsidizing them. And they're completely fine with that. Any time I can get something tax free -- even from Amazon -- then more power to me. And them.

    When I can stop subsidizing breeders, we can start talking about "fair" and "unfair" when related to taxes.

     

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  2.  
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    R. H., Oct 26th, 2007 @ 6:09pm

    Use Tax Anyone?

    Here in Michigan we have a 6% use tax. 6% being the same percentage as our sales tax. If a Michigander buys any item that would be covered under sales tax online and the online retailer does NOT charge sales tax, we are expected to declare the value of these items on our Michigan Income Tax forms and pay the 6% on them. However, most people that I know don't actually pay their use tax it's kind of hard to enforce after all.

     

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  3.  
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    Anonymous Coward, Oct 26th, 2007 @ 6:24pm

    I don't like paying taxes any more than anyone else; but lets get real about the difficulty for online retailers.

    Cheap, effective software will make it simple enough. My business uses it now. In addition, businesses usually pay sales taxes to each State in one payment. Then the State distributes funds to the municipalities.

    Please do a little bit of research before you write an article.

     

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  4.  
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    Dick Fer, Oct 26th, 2007 @ 6:56pm

    Professors

    Why does the news media need to run to college campuses to talk to these idiots? These professors can't run a business. They have no idea what it's like in the real world.

    Mail order businesses have always had tax-free sales. The disadvantage to mail order is the cost of shipping. Also, you lose the sense of immediate gratification. Shopping locally, you can find something immediately. And in some cases, you're paying for the brick and mortar store. You're paying the employees to serve the consumer, answer questions, etc. Amazon (and every other mail order firm) doesn't have to maintain a store in every locale. They don't have a bunch of people to wait on you either. It's self-service.
    Why do people give college professors so much credit? 99% of these morons would get fired from most jobs because they can't function in any real world job. Can you imagine a college professor working as an insurance agent? Or a loan officer at a bank? These people would get fired, or they'd starve to death. Why are they suddenly considered experts?
    The only professors I respected in college were in math and the hard sciences. Biology, Chemistry, Physics, Calculus.

     

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  5.  
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    Frenchy Frog, Oct 26th, 2007 @ 7:08pm

    Re: Anonymous Coward

    Do you claim to deal with retail customers in more than 40 different states and hundreds of different municipalities across the entire United States in your business? You are incorrect if you think that "businesses usually pay sales taxes to each State in one payment"! Dependening on the amount of business you do, you have to make quarterly, monthly, or even weekly tax payments to the several different states and municipalities. "Please do a little bit of research before you write" a response to an article!

     

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  6.  
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    John, Oct 26th, 2007 @ 9:04pm

    "Amazon uses few if any services from state or local governments in Missouri, so it's hard to see anything unfair about the fact that it doesn't have to collect sales taxes here." - The argument is a little flawed. The tax is not imposed on Amazon (it does have the administrative problems associated with its collection and remittance). It is imposed on the residents of the state/municipality, who presumably do consume the services paid for by the tax.

     

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  7.  
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    please re-read the article, Oct 26th, 2007 @ 9:08pm

    I'm confused *Professors*, why are you talking about college professors? Is it because the guy's name was "Dean Baker??" I guess running that business of yours hasn't taught you how to read terribly well. I believe it stats "Economist Dean Baker." And even if you just read Dean wrong and though they are talking about colleges, you should realize that just because we teach at a school doesn't mean we agree with the dean of it.

     

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  8.  
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    Michael, Oct 27th, 2007 @ 4:17am

    Another issue -- "no taxation without representation!" A business in a city that overtaxes can always threaten to move. It's employees can lobby that city, or vote in its elections. Same at the state level. A company outside the city has no assets it can pull from the city. Yes, Amazon could refuse to sell there, but it's not costing the city any jobs.

    What prevents the city from double-taxing outside companies? There's not much they can do about it. And if you think no city would do this, look into "hotel taxes." Lots of places add taxes to hotels without any service cost justification. The hotels complain, but they aren't going to up and move from tourist areas. They just pass the cost along to tourists. Since these are all outsiders with no local representation, the tax has little opposition.

     

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  9.  
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    Anonymous Coward, Oct 27th, 2007 @ 5:53am

    "No taxation without representation" was a party line really Michael. It was a slogan that sounded nice. The real reason had nothing really to do with representation. It was the fact that import goods to the colonies were taxed multiple times, while export goods were taxed several times less. What that means is, England was keeping the colonies artificially poor by charging them more for import, and paying them less for export. If England would have played fair with the balance of taxes on both import and export, chances are the US would have continued to be a colony right up till the fall of the British Empire.

     

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  10.  
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    Michael, Oct 27th, 2007 @ 7:52am

    Slogan or not, "no taxation without representation" is still valid. How do you expect democracy to work if you are subject to laws you don't even get to vote on? How do you expect taxing authorities to limit themselves if they can tax outside their jurisdictions without consequences?

     

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  11.  
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    Halycon, Oct 27th, 2007 @ 8:40am

    Re: Taxes

    I'm the Anon guy up above, anyway. Putting aside the fact that we're not a democracy. We already tax outside our jurisdiction, often. Currently we are taxing Iraq's oil reserves to help drum up and fund a war. Every year each citizen of the US pays an unconstitutional income tax. We tax every country in the world a sur-charge to buy oil, since by international law(which we strong armed into place), all oil transactions must be payed for with US Dollars. We tax in so many places we don't have jurisdiction over its not even funny. Inside and outside our borders. The revolutionary war was fought because of double and triple taxing of goods, and we do that too. Not on everything, certainly. But some good are taxed at the point of gathering, the point of refinement/production, and at the point of sale. The only reason, online sellers have gotten the ride they've gotten so far away from taxes, is no one can agree on HOW to tax them. You're highly deluding yourself if you think the government isn't salivating on the revenue stream.

     

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  12.  
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    Dean Baker, Oct 27th, 2007 @ 8:51am

    If I get exempted from a fee that everyone else has to pay, this is a subsidy. And Amazon is getting a subsidy in the states that have sales taxes, since they do not have to pay the tax, by virtue of their superior lobbyists.

    While there are some services that stores with a physical presence benefit from as result of being there, this is at most a tiny fraction of the cost of the tax. And, guess what, Amazon benefits from the police and fire service too, because no one would order from Amazon if they thought that people could hijack the UPS trucks delivering their stuff and steal it with impunity before it got to their doorstep.

    In terms of the difficulty of complying with the tax, maybe someone should tell Amazon about a thing called "computers." It makes it real easy to process thousands of different tax rates on different items, almost all of which correspond to zip codes that they have on their mailing address. Frankly, any Internet retailer that can't figure out a method for coding the sales taxes is probably too incompetent to be in business. Will there me some mistakes? Guess what, there are mistakes now, this is not a serious argument.

     

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  13.  
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    Evil Mike, Oct 27th, 2007 @ 9:50am

    Taxes

    Taxes are simply unjust.

    If the government were an animal, wouldn't we group it it by feeding method? It feeds the same way that leeches, mosquitoes, ticks, and hookworms do.

    Maybe it's really just another parasite...

     

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  14.  
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    Doug Aamoth, Oct 27th, 2007 @ 10:09am

    "And, guess what, Amazon benefits from the police and fire service too, because no one would order from Amazon if they thought that people could hijack the UPS trucks delivering their stuff and steal it with impunity before it got to their doorstep."

    That burden is not on Amazon, it is on UPS which pays taxes anywhere it physically operates. What you're suggesting would be a double tax for use of the same services - paid once by Amazon's customers and again by UPS. It has nothing to do with Amazon.

    No one would order from ANYWHERE, ship anything to friends and loved ones, or use UPS for anything else if they thought that people could hijack the UPS trucks delivering their stuff and steal it with impunity before it got to their doorstep.

     

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  15.  
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    Bretton, Oct 27th, 2007 @ 10:16am

    .

    Sales taxes can only be legally (Constitutionally) applied & enforced within the 'legal jurisdiction' of the taxing authority.

    A 'taxing authority' has zero legal right to operate outside its geographic limits. New York cannot tax its residents for purchases made while visiting California, but California can tax non-resident New Yorkers when they buy things while physically visiting California.

    The legal residence of a buyer has no bearing on state & local sales tax "authority".

    Sales taxes can only be legally assessed & collected at the geographic location of the sales transaction -- the place where the sale is made and recorded.

    An internet sale is transacted & recorded ("point of sale") at the geographic location of the seller's computer/server.

    That's the only place a sales tax may be legally collected. It legally makes no difference whether or not the particular seller has some other facility or presence within a buyer's state -- the tax may only be applied at the specific point of a specific sale.

    Catalog mail order sales always worked that way for interstate sales. Of course, many greedy state & local politicians have aggressively (and illegally) forced some retailers to collect sales taxes on residents who make catalog & internet purchases out of state.

    The Commerce Clause in the U.S. Constitution prohibits states from imposing any taxes on businesses & sales conducted in other states.

    Nonetheless, there is no limit to governments' desire for tax revenue -- whatever is left that isn't taxed now........will be taxed in the future, legally or not. The courts are government agents and rarely will protect citizen rights against unjust taxes.

     

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  16.  
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    Max Powers at http://ConsumerFight.com, Oct 27th, 2007 @ 10:20am

    Tax Fairness

    To charge a tax is a part of life to support our government. To charge an unfair tax or double taxation is a crime against the consumer. One of my pet peeves is the taxation on gambling winnings.

    The government is so stupid that it decided to outlaw Internet gambling throwing away billions in taxes. Now I get to play online anyway (there have been more sign-ups since it became illegal) and never have to pay any taxes on my winnings. Thanks Bush.

     

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  17.  
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    ConceptJunkie (profile), Oct 27th, 2007 @ 10:43am

    Re: Fair.

    Let's not be holier than thou here. I have four kids and probably contribute more to government, net, than you do, and will certainly be doing so when my kids are paying for the Social Security you'll be collecting some day (assuming it still exists, which is another topic).

    I don't resent having to pay for things like education because that's an investment in the future (or at least if the education actually works, but that's another topic).

    I could name a hundred ways in which my taxes are used that I _do_ resent that have nothing to do with tax breaks or kids or anything else. The fact of the matter is, our government could do everything it does with 10% of the money it spends now (and I think I'm being generous... I wouldn't be surprised if it's more like 3%).

    Tax rate/cuts/breaksrebates are not the problem, it's our grotesquely corrupt politicians that hemorrhage money faster than their brains leak out of their heads, and their big business, rich or otherwise influential puppetmasters. 90% or more of the Federal Government exists solely to provide easy money to anyone with enough moxie to swindle themselves some.

     

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  18.  
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    Joe Smith, Oct 27th, 2007 @ 1:20pm

    Re: Tax arbitrage

    If I get exempted from a fee that everyone else has to pay, this is a subsidy. And Amazon is getting a subsidy in the states that have sales taxes, since they do not have to pay the tax, by virtue of their superior lobbyists.

    A tax is not a fee. A sales tax is levied on the buyer, not the seller, even though it is collected by the seller. No government in the United States is ever going to say that a tax break is a subsidy since it would be a confession that most governments are engaged in massive subsidies to other industries (car manufacturing for example).

     

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  19.  
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    Dean Baker, Oct 27th, 2007 @ 1:29pm

    I just love to see people defending tax scams. (For the record, states differ on what they subject to sales tax [the point that the boys and girls at Amazon whine about], but I would be fairly certain that UPS deliveries are not subject to tax in most states.)

    Anyhow, just to make things clearer, the sales tax is primarily a mechanism for collecting tax from consumers in the state. We can do analyses of incidence, which will differ some by product, but in most cases, most of the incidence will fall on the consumer.

    Given this fact, imagine that we have the Jeff Bezos tax scam shop (a.k.a. Amazon.com). They don't make you pay the tax. Naturally you will be willing to give most of your savings to Mr. Bezos, since even if you just managed to pocket 20 percent of the tax savings, you're still way ahead.

    This is the Amazon.com business model -- it's Internet existence is beside the point. Honest anti-tax conservatives propose cutting taxes, not creating tax scams for those who have the opportunity and willingness to do so.

     

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  20.  
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    Rick, Oct 27th, 2007 @ 1:37pm

    Sales Tax Ruling

    The States took a big Mail order office supply company to Court. About 20 of the states jumped on the bandwagon. It went all the way to the US Supreme court. The Supreme court said it was way beyond the scope of any business to be able to figure out the 15,000 different sales tax rates in the United States. The decision left the door open to the states if they could get together and get a non confusing tax like maybe even just one tax rate per zip code. The States have loved having the authority to individualize taxes to local areas as small as one block square areas. They are paying the price of Tax complications. I believe there are 4 states without sales tax, Montana, Oregon, Alaska, and I think New Hampshire. If the Office supply company had had only 46 different tax rates to deal with the Supreme Court would have sided with the states.

     

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  21.  

    Complicated Taxation

    As Rick stated above, simplification of taxes in the States would benefit them overall.

    But Dean, are you only against Amazon.com or all online/mail order type businesses that don't feel compelled to collect each states tax for them? You call this a tax scam?

    The only tax scam in this country is how our taxes are spent as ConceptJunkie points out. Someday we might clean out all the corruptness in Washington when all the old farts die off and this next generation puts people in office that pays attention to the will of the people.

     

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  22.  
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    Zonie, Oct 28th, 2007 @ 8:00am

    Does anyone here understand sales tax?

    Amazon is already paying all the taxes that they would even if they were to collect sales taxes. These include property taxes, income taxes on retained profits and believe it or not, anything that they purchase for their own use (ie. tools, supplies, computer equipment, pallet jacks, etc.) within their facilities. They purchase goods for sale tax free (as any other retailer does).

    Sales taxes are collected FROM the end user (you and I) BY the retailer and then forwarded to the taxing authority. The only burden on Amazon and other online retailers would be the collection and mailing of collected taxes to the states and municipalities.

    Because government wants to collect their fair share of taxes on goods and services, the burden to collect those taxes is places on the retailer. It is no different that your employer deducting your federal and state tax withholdings from your gross wages.

    Those are the facts - plain and simple. Now for the opinion part: Sales tax exemption on online purchases IS as subsidy to the consumer - not the retailer. The purpose of the lack of collection of sales taxes on online purchases was to boost online sales to help online retailers get a foothold.

    I am not a tax authority, but I used to be an accountant and that is where I am speaking from.

     

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  23.  
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    Bretton, Oct 28th, 2007 @ 9:20am



    _____________

    Wrong.

    Sales taxes are a tax on the 'seller'.

    If sellers could so easily have charged their buyers another 6-8% in product pricing (sales-tax equivalent price increase) -- they would already have done so to maximize their seller profits.

    That's how markets work. Would you intentionally sell your car, house, or EBay stuff for less than buyers were willing to pay for it ? If you added an automatic 6-8% 'Special-Zonie-Sales-Fee' to all prices of your stuff for sale -- do you think potential buyers would just pay it without considering it in their purchase decisions ??

    Market prices are determined only by 'Supply & Demand'. That's Economics 101 everywhere.

    Government imposed sales taxes do not change either the market supply nor demand for particular products. Therefore, any sales tax levy can only be taken from the seller -- because buyers overall will not pay more than market prices. It reduces seller profits and increases seller costs. Sales taxes are ultimately an income tax on sellers (...and sellers are also forced to be unpaid tax-collectors for the government).

    Sales taxes are not shifted forward to buyers. If that were true, consumers could just shift the extra sales tax cost to the buyers of their labor (employers) thru higher wage demands; it would be an endless circle of shifting, where nobody ever really paid the sales tax (??)

    Amazon.com gets zero subsidies from any government sales taxes -- only reduced profits & sales.

     

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  24.  
    identicon
    dan, Oct 28th, 2007 @ 9:06pm

    Re:

    It is not that easy... In Iowa, the sales tax is by county and city (a city can cross county lines). How many web sites have visited that asked for your county? ZIP Code gets close doing the job, but again, is not perfect.

     

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  25.  
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    Killer_Tofu (profile), Oct 29th, 2007 @ 6:31am

    Heh

    *mean moment*
    Here in MI, we do have the Use Tax exactly as post #2 mentioned.
    Its stupid, just like Dean Baker.
    */mean moment*

     

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  26.  
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    jcicora, Oct 29th, 2007 @ 10:19am

    Re: Sales Tax Ruling

    Delaware does not have a sales tax

     

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  27.  
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    erinol0, Oct 29th, 2007 @ 2:09pm

    Re: Complicated Taxation

    "Someday we might clean out all the corruptness in Washington when all the old farts die off and this next generation puts people in office that pays attention to the will of the people."

    --nice thought, and I'm sure that those "old farts" said the same thing when they were younger (think about the 60s). What we need is a truly fundamental shift in politics if we're going to see that happen.

     

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  28.  
    identicon
    Tax me, Oct 30th, 2007 @ 2:57pm

    Re: Cost often considered pre-tax

    "Given this fact, imagine that we have the Jeff Bezos tax scam shop (a.k.a. Amazon.com). They don't make you pay the tax. Naturally you will be willing to give most of your savings to Mr. Bezos, since even if you just managed to pocket 20 percent of the tax savings, you're still way ahead."

    See... I have never thought "I'll buy this from Amazon because then I will not have to pay sales tax". Usually, I check my local stores, and several online retailers and buy from Amazon when they are cheaper. When I get to check out, the absence of a sales tax is a perk. I do not think about it when making my everyday purchases.

     

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