Amazon Taxes Rely on Economic Fallacy

Amazon Taxes Rely on Economic Fallacy
by Fergus Hodgson, July 7, 2011

The "Amazon" tax neither generates revenue nor creates a level playing field. It does eliminate profitable relationships and drive companies out-of-state, but that hasn't stopped elected officials from plowing ahead obstinately.

Concerned that people can avoid sales taxes by shopping online, seven states have passed legislation to place out-of-state retailers within their jurisdiction. Fourteen more have either considered it or have pending legislation. So long as the retailers have in-state affiliates -- advertisers with mere hyperlinks -- officials shall attempt to tax them.

California is the most recent to pass this initiative, amid claims that it would generate $200 million to $317 million annually. However, of the previous six states to attempt this, only New York has managed to generate additional sales tax revenue. And even New York, which is engaged in a legal battle with online retailers, will most likely have to refund this revenue due to the law's more-than-questionable constitutionality. (California faces even stiffer legal challenges, and a member of the agency responsible for implementation has acknowledged the largest firms have no intention of complying.)

In fact, in at least Rhode Island and North Carolina the initiatives appear to have reduced the overall tax intake. Rather than pay the tax, large online retailers such as Amazon.com and Overstock.com have simply cut ties with in-state affiliates. So the affiliates have either had to move out or see their business plummet, along with their income-tax payments.

This forgone economic activity, known as the "deadweight loss," is an inevitable pattern with taxation, and it is more pronounced in portable industries. However, as Henry Hazlitt wrote in the classic Economics in One Lesson, the tendency of men to see only the immediate effects of a given policy allows fallacious thinking to creep in. As they crave another tax source, the affirming legislators appear to be ignoring the secondary consequences.

Hazlitt also noted the special pleading of vested interests as a source of fallacies, since ignorance of an economic outcome may sway an argument in one's favor. In this case, the biggest proponents and beneficiaries, brick and mortar retailers such as Walmart, are concerned with fighting back online competitors, not the broader outcome.

They call for a level playing field, and their chief lobbying organization is the Alliance for Main Street Fairness. The hypocrisy of these businesses, though, is hard to stomach. From 1997 to 2007, Walmart, for example, lobbied for and used corporate loopholes, rebates, and subsidies to pay only about half of its statutory state taxes. The latest estimate has this number at an annual $400 million.

Even if the goal were sincere, an Amazon tax does not achieve a level playing field. As the Tax Foundation has pointed out, affected online retailers collect taxes based on where the customer resides, while conventional retailers collect taxes based on where the business is located. All the while, online retailers without in-state affiliates retain their competitive advantage and sell items tax-free, regardless of where the customer may be.

The reality is that the Internet is allowing people to more easily avoid taxes, and flailing about with an Amazon tax is not going to change that. It's untenable to enforce a uniform sales tax on people who buy and sell on Craigslist and eBay or those who sell from outside the United States, and the heightened presence of sales taxes will drive even more people to those outlets. Even the more easily policed, larger companies like Amazon.com have demonstrated their ability to shift activities to lower-tax jurisdictions.

While the fiscally mismanaged and desperate states like Illinois, California, and New York blindly pursue the Amazon tax, five states don't have a sales tax to begin with. That's a level playing field: zero for all. These five states are the ones that will win out as their status as Internet tax havens grows in importance. Ironically, through migration of people and companies, they will also benefit from expanded tax bases.


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