Suffering depleted coffers and unwilling to seriously trim spending, state-level politicians once again hungrily eye Internet commerce as a feeding trough to satisfy their appetite for new revenue. Only the problems of taxing across a multitude of jurisdictions and federal disinterest in acting as a super-tax collector for the states stand in the way of a national feeding frenzy at the taxpayers' expense.

In 1992, the Supreme Court ruled that states can't tax sales made to in-state residents by vendors physically located elsewhere — unless Congress specifically says otherwise. Fearing that the demands of complying with a host of state and local taxes would swamp all but the largest companies under an avalanche of paperwork, Congress has yet to pass any such scheme into law.

For their part, state officials insist that billions of dollars worth of business is going untaxed at a time when states struggle to make ends meet. To address concerns about the impossible demands involved in satisfying a multitude of tax jurisdictions, the National Governors Association swears that its Streamlined Sales Tax Project will ease the burden of tax compliance on Internet retailers and tap a new source of necessary revenues.

In reality, though, it's not clear that Internet commerce really represents such a potential bonanza for state tax authorities. Nor does the NGA's scheme necessarily solve the paperwork headache posed by charging purchasers the sales taxes due in their hometowns, collecting the money, and forwarding it to tax authorities across the country.

Hungry for revenue, state officials rarely acknowledge a key 1999 study by the accounting firm of Ernst & Young which found that much online commerce is simply untaxable. The study concluded that all state and local governments together lost less that $170 million in potential revenue in 1998 — an insignificant sum compared to monies already flowing into tax coffers.

And the bill for chasing after those dollars would have been very high. A separate Ernst & Young study suggested that, for small firms, the cost of serving as surrogate tax collectors could be as much as 87 percent of the money collected.

But Internet commerce has become increasingly mainstream since the 1999 study, and riches may yet be had — or so state officials hope. To persuade Congress to ease the way for a national sales tax system, the NGA's Streamlined Sales Tax Project would standardize sales tax laws across the country and certify software packages that retailers could use to collect the loot. At least for the moment, the NGA is even offering to share some of the take with businesses to alleviate costs and reduce opposition.

There's a real possibility, though, that even a streamlined tax system could kill the goose that's laying a growing number of golden eggs. The tax-free nature of many Internet transactions is a strong incentive for online purchases. A survey by BizRate found that nearly 60 percent of consumers said they'd make fewer purchases online if they had to cough up extra for the tax man.

If it discourages sales, the sales tax plan might well prove to be a relatively efficient scheme for strangling small businesses without producing much in the way of revenue.

Then there are the ramifications of a system designed to track online transactions. In a Heritage Foundation report on the NGA's tax plan, author Adam D. Thierer points out, "there would have to be some way to track the location of the buyer at all times in order to remit money to the appropriate tax collectors."

Grover Norquist, president of Americans for Tax Reform, asks, "How do you do this without massive violations of privacy?"

The NGA promises to structure its system to keep transactions anonymous, but tax collectors have yet to establish a reputation for respecting personal privacy.

The NGA's proposal to win retailers over by sharing revenue with them also raises red flags. Thierer points out that "Third party tax collection creates a perverse incentive for deputized private-sector tax collectors to engage in overzealous enforcement to increase their own profits."

Writing for Michigan's Mackinac Center, Lawrence W. Reed came to similar conclusions about the dangers of imposing a national system to monitor and tax online transactions. Rather than give in to the NGA's demands, Reed says, Congress should "clarify and codify constitutional and Supreme Court precedents regarding the taxation and regulation of interstate commerce."

That is, the barrier to state efforts to turn businesses in other states into surrogate tax collectors should be raised, not lowered.

In the end, state officials would do us all a favor if they gave up their turn at the Internet commerce feeding trough. That's a meal unlikely to be as filling as they imagine, and which would starve small retailers of business and consumers of privacy.

J.D. Tuccille is a Sedona-based Senior Editor of The Henry Hazlitt Foundation's Free-Market.Net (http://www.free-market.net/).

— Arizona Daily Sun

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