The Internet is going insane now that the Internet sales tax bill has passed a test vote in the Senate. The bill would require companies with sales of more than a million dollars worth of out-of-state sales to collect sales tax for the states where their customers live.
Why is this needed? When people buy things from out-of-state companies through mail order or the Internet they're supposed to pay sales tax to their state. But no one does. This means that the states, most of which are really strapped for cash these days, are not getting funds needed to pay for the services used by the freeloaders who actually live there. We're talking tens of billions of dollars here.
Thus, Internet companies that don't pay sales tax have a huge advantage over local businesses. Retailers watch helplessly as people stroll down the aisles of their stores looking at merchandise, trying it out and asking clerks questions, only to place an order on Amazon with their cellphone while they're still in the store.
The Senate bill, once opposed by Amazon, now enjoys the Internet pioneer's backing. The reason is that Amazon will soon be paying sales taxes anyway, because it's planning to build warehouses near large cities to achieve same-day delivery, allowing them to compete directly with brick and mortar retailers.
But some people are attributing a more sinister motive: they think Amazon wants to crush any upstart competitors by making them collect onerous sales taxes. This, everyone fears, will stifle innovation and snuff out the entrepreneurial spirit forever more.
Typical reactions to the bill are like Megan McArdle's, of The Daily Beast. They argue that small businesses won't be able to handle paying sales tax to all those jurisdictions. However, opponents of the bill keep forgetting that this will only affect companies with at least one million dollars in out-of-state sales. Small businesses will never have to bother with collecting out-of-state sales taxes.
All this outrage is misplaced. The real problem is that the sales tax system is broken and this is the perfect opportunity to fix it.
The thing is, many small businesses already have to collect out-of-state sales taxes. For example, if you're a small vendor who sells stuffed animals, or comic books, or Star Wars light-sabers at out-of-state at conventions like Comic-Con or Gen-Con you have to collect sales tax for anything you sell
there. And then you often have to continue to file with those states for years afterwards, even though you may never make another sale there again.
Selling things on the Internet is exactly the same thing: the customer brings your virtual sales floor directly onto their computer screen, and they make the purchase in their home.
Computing sales tax on such purchases is not difficult. This is the Internet, after all, and there are computers. Computers can take an address and calculate exactly how much sales tax is due and who should get it. PayPal already does this on behalf of small businesses, though it's up to the businesses to do the necessary filings and payments to the state.
And that's where the magic of entrepreneurship comes in. This is a perfect opportunity for an someone to start up a new Internet business to make collecting sales taxes painless for everyone.
When this bill becomes law state legislatures will have a huge incentive to streamline their sales-tax filing systems, which are predicated on the idea that only in-state businesses collect sales taxes. They will rush to provide mechanisms for direct computerized payment of sales taxes, and eliminate onerous filing requirements.
That will also make it easier for in-state companies to collect sales taxes. And that's a win for everyone.
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