Friday, March 11, 2011

Online sales tax issue makes strange bedfellows of politically disparate groups and individuals

If there is one truth in life, besides death, it is that whatever the political issue, in the end it will always be about "money". Money, it seems, can bring two different people together and separate two people who normally would have much in common. Take online sales taxes . . .

I was lucky enough to have live in the Bay Area around the time of the Internet revolution, that giddy period of time that produced The Industry Standard -- that now oft forgotten industry weekly that grew from start-up to the number one magazine in the world, before crashing out completely, all in a three years.

Back then the industry was pretty unified behind the idea that online transactions shouldn't be taxed. It was believed that collecting sales taxes would slow the growth of the Internet -- and that was anti-business. Of course, who were these Internet pioneers? Mostly liberal techies.
Then there were the more conservative business people who tended not to have much of an opinion about taxing online transactions because they were pretty sure that whole tubes thing was just a passing fade anyway. They, too, were pro-business types, anti-taxes, but they knew where their bread was buttered, and it was the brick and mortar stores that did the advertising, so their interests lay there. So these media executives went back to worrying about their print products and left the early web experiments to the dweebs.

OK, this is definitely generalizing, and I'm sure there are plenty of examples of the opposite being true, but my memory of life in the fast lane of those Internet days says this was the way it was.

So now we have today's online sales tax debate where we have Jeff Bezos and Amazon saying that collecting online sales taxes are an evil thing. So they will do what they can to avoid them, including ending its associates programs in those states that try and impose them.

In the other corner we have the state of Illinois, who now wants to tax online sales transactions, if, and this is important, the company has a physical presence in the state through employment or associates.

To be clarify why the law was passed this way one has to understand that Illinois' hands are tied by a 1992 U.S. Supreme Court ruling that said a state can only collect sales taxes on online sales if the company selling the goods has a presence in that state. So Illinois could not pass a blanket sales tax law -- once again state's rights wins out over consistent, logical policy.

The politicians who passed the law want to argue that the reason for the new law is both fairness, and the need to raise revenue. Those businesses against the law obviously see this as a setback to the advantages built-in from having lower prices due to no sales tax.

So who loves this bill? Certainly not conservatives. Read the comments on the WSJ story today:

"Illinois never met a tax they didn't like. Keep it up while the adjacent states curb unions and cut taxes," writes one commenter.

So business people hate this bill, right? Well, no, not really. In fact, the bill was supported by the Retail Industry Leaders Association, members of which include Walmart, Best Buy and other big-box retailers who, to be sure, are no friends of the Democrats.

"Gov. Quinn has taken a bold step today to help level the playing field for retailers in Illinois,"Sandy Quinn, president of a trade group, is quoted this morning in the WSJ.

In the end we have a strange mix of supporters and opponents on this issue. Conservatives are generally against online sales taxes because, well, they are taxes. Taxes, you see, are bad. Get rid of taxes and everything is wonderful (except schools, roads, policing, fire protection, etc.)

On the other side, are the liberals, who I have found are on both sides of this debate. Many say that raising revenue is the only way to balance the state's budget, and besides, brick and mortar stores have to collect sales taxes, why shouldn't online retailers. Others are still philosophical for a moratorium on online taxes as a way of spurring Internet growth.

So did this legislation become law because Illinois Democrats love taxes and want to raise revenue. Again, no.

This bill has zero to do with revenue.

This bill was passed for the same reason last year's retail wine shipment bill was passed. That bill, if you remember, forbade out-of-state retailers from being allowed to ship wine to in-state consumers. It was passed overwhelmingly and is 100 percent anti-consumer. But was it anti-business -- the in-state liquor retailers didn't think so. The law was passed to make political donors happy. It didn't raise a penny, and it didn't stop one shipment from occurring -- out-of-state retailers easily bypassed the law by using third party shippers who could not be prevented from shipping across state lines thanks to a Supreme Court ruling that opened up the practice for wineries. It was, simply, a gift to an industry group that contributes money to the politicians.

Again here, we have the in-state retailers, represented by the Retail Industry Leaders Association, against the online retailers -- who do you think is going to win?

Will it raise revenue? Yes, but not very much -- pennies, actually. You see Amazon has no intention of collecting sales taxes for Illinois. But dumping their associates they will be able to avoid the whole thing. In fact, online retailers argue that this will cost the state money because those associates pay taxes. But the Performance Marketing Association, the trade group that represents affiliate marketers, says that all the affiliate revenue collected in Illinois adds up to $18 million in 2009 -- that's a lot of money for you and me, but peanuts to state government -- especially since it won't all go away, and some will be made up from sales taxes collected from those online retailers who will maintain their in-state presence in some manner.

In the end, this is revenue neutral. So why do it? Because it is a political gift to the on-state big box retailer, the sale retailers who get huge tax breaks from municipalities who lure these companies to build in their towns.

Nobody here comes off looking very good. The online retailers like Amazon, a company that recently cut off services to WikiLeaks, comes off as a spoiled child, willing to do the government's bidding if it suits them, but won't play ball if it costs them a single sale. The Illinois legislature might as well have a For Sale sign on it, as Democrats in the state continue to build on their reputations as some of the most corrupt in the nation.

My position here is that the need for the moratorium on online sales tax has outlived its usefulness. After all, online sales continue to grow every year at the expense of retailers with a physical presence -- ask Borders. But is having a sales tax moratorium an unfair advantage? No more so than having the property tax of a brick and mortar retailer lowered.

The online sales tax issue is ugly and getting uglier. Because of this Illinois would have been better off not passing anything at all, since it won't raise revenue, and it will inconvenience consumers and tax payers. But Amazon needs to understand that one day the Supreme Court may reverse its ruling as say that a sale is a sale. Many conservatives keep pushing a VAT-styled sales tax for the nation, and that will surely include online retailers.