The Internet Sales Tax: Will It Help Or Hurt Small Business?

Last Updated Jul 20, 2011 12:10 PM EDT

If you divide the world into online sellers and bricks-and-mortar retailers, it's easy to discern who would be hurt and who would be helped if state taxing authorities succeed in forcing Internet retailers to collect sales taxes on their transactions. It's bad news for online sellers, who'll lose a 5 percent to 10 percent pricing edge over their brick-bound competitors, and it's good news for conventional retailers, who won't be hampered by that pricing burden.

It would also be fantastic news for state budgeters. Taxing entities give up an estimated $11.4 billion a year, according to a University of Tennessee study, because local shoppers, who technically are required to pay taxes on Internet purchases, in practice never do. If online retailers were, like their land-locked colleagues, required to collect the taxes at time of purchase, tax collectors would unlock a virtual flood of cash to support strapped state finances.

When it comes to small businesses, some would be hurt and some would be helped. However, since bricks-and-mortar retailers are far more numerous than online sellers, it seems likely that overall small businesses would benefit. That's leaving aside the fact that online retail giants increasingly dominate e-commerce. If you're still not sure which way to jump, the arguments in favor of not taxing online transactions lay out like this:

  • It's unconstitutional. and other online biggies are strict constructionists when it comes to constitutional protections of their right to evade the taxes that local business must pay, notes The Atlantic. They note that only the federal government has power to regulate commerce between states, and that imposing a sales tax illegally infringes on this right.
  • It's too complicated. In many states the sales tax varies from one locality to another. For instance, in Arizona, notes, some cities tax food sales, while others don't. Online retailers argue that it would be too complicated to figure out what is taxable and what isn't. This, of course, is absurd. They can figure shipping costs to the ZIP code, but can't figure taxes?
  • Any tax increase is unwise right now. Republican politicians have a long-running refrain to the effect that raising taxes in any way, including closing loopholes, would harm the recovery. It's not clear whether a proposal to have e-commerce companies act as collectors for a tax that is already due would have the same effect. Economic arguments aside, results of a March poll by Rasmussen Reports, show 63 percent of Americans don't want any federal tax imposed on Internet sales.
In the end, it's likely that the only argument that matters will concern who has the most clout. Small business owners are looking like the odd man out here. is collecting signatures for a petition to overturn the California sales tax law, Bloomberg reports. And, given that there are more bargain-hungry shoppers than tax-paying small business owners, you have to give Bezos & Co. a good chance of getting their signatures.

Mark Henricks is an Austin, Texas, freelance journalist whose reporting on business, technology and other topics has appeared in The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications. Learn more about him at The Article Authority. Follow him on Twitter @bizmyths.
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  • Mark Henricks

    Mark Henricks' reporting on business and other topics has appeared in The Wall Street Journal, The New York Times, The Washington Post, Inc., Entrepreneur, and many other leading publications. He lives in Austin, Texas, where myth looms as large as it does anywhere.