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Internet taxation

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The U.S. Senate capitulated to America’s big box retailers this week, when it approved complex legislation to require all Internet merchants to collect state and local sales taxes on their sales.

The explosion of commerce on websites around the world has given consumers more market choices and an opportunity for families to buy clothing, shoes and specialty products, or to select from a wider array of merchandise than is available in their hometowns. Many of those sales have been taxed ,and some have not. Sales made by a company with a physical presence in a state are taxable. Other sales weren’t taxed, because the seller was doing business in a tax free state or did not have outlets in the buyer’s home state.

That apparently bothered the Walmart and Target behemoths of retailing. The giant retailers want to eliminate whatever competition they had from tiny Internet businesses. They took their case to Congress joining cash-strapped states looking for additional tax revenue. They argued that the time had come to make everyone else collect sales taxes just like they already do. In the political squabbling over the question the Senate produced another massive piece of legislation that apparently most senators did not bother to read.

On the surface the bill seems to say small businesses need to collect sales taxes and remit them to their home state, which will then create a bureaucracy to distribute the money to the proper taxing authority. Left unclear is the enforcement procedure. Even the author of the bill, Sen. Mike Enzi of Wyoming, cannot tell anyone just how many jurisdictions will be allowed to audit Internet merchants.

Will every sales tax collection jurisdiction be able to order an audit of a mom-and- pop Internet outlet or does the legislation limit the enforcement to the states? The senator who wrote the bill doesn’t know. The question was further muddied when at the last minute the law was amended to allow every Indian tribe in the country to audit the books of any business in the nation to determine whether the tribe has received the required tax revenue.

The bill also exempts a business with sales of less than $1 million and 50 employees. The bill creates a structure of regulation that will lead to little more than a whole new industry for lawyers and accountants to create enough small-business platforms for entrepreneurs to keep their businesses tax free.

The irony in all this is that a great deal of today’s Internet sales are already taxed. All large retailers with stores across the country collect sales tax on their website operations. The sales that are not taxed are small businesses, which have developed a niche product array that appeals to certain shoppers.

The major retailers which dominate America have already heavily damaged the small-store market in America’s cities and villages. The small shoe, clothing and hardware stores, which dotted downtowns across the country, have been replaced by major retailers like Walmart and Ace hardware who built huge stores on the edge of town.

However one large business, eBay, has it right. They opposed this legislation to protect the millions of people who use the nationwide market eBay created to bring sellers and buyers together.

The bill now goes to the House of Representatives, where hopefully enough members will read it carefully and decide that more interference with small businesses is not worth setting up a 50-state bureaucracy to enforce a law which will hardly increase revenues to state and local governments.

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