There is a story in the St. Louis Post-Dispatch (link via Combest) about how states are pushing for a new tax on Internet sales. It starts out talking about how New York wants to tax Amazon, and narrows its focus to Missouri and Illinois. The article says that Missouri “lost” as much as $400 million on Internet sales (which may actually be closer to $122 million, because that larger figure was derived from an early estimate of 2008 online sales that was much higher than the actual total turned out to be), and that “in these times,” legislators and states may be looking in new places for revenue.

The article says that Internet sales are on the rise for the second straight year, hitting $204 billion annually (which again is probably an overestimate), while traditional brick-and-mortar stores are continuing to lose money.  In 1992, the U.S. Supreme Court said that the state couldn’t collect a sales tax from a particular business unless it had a physical presence in that state — but Congress could lift that ban at any time. As we stand on the razor’s edge of a serious economic downturn, I believe it’s a mistake to institute new tax policy that would dampen consumer spending even more.

The article seems to totally disregard why Internet sales are up.  When the market is allowed to operate without interference, this allows a clearer view of what the invisible hand is doing. Things are cheaper online largely because they don’t involve sales tax, and are subject to fewer labor costs, but online products also often come with free shipping — and there is no added personal cost of travel to and from a store. The combination of these factors — the ease of shopping from home, paying less, and easily finding desired products — makes clear why Internet sales are on the rise. These are also good reasons for local stores to place their inventory online and lobby for lower taxes — not push for more taxes. Although placing a tax on Internet sales (whether by the local, state, or federal government) may appear to level the playing field, at least from the brick-and-mortar perspective, it really serves as a protectionist measure for local stores without benefiting consumers.

As a sidenote to the whole idea of Internet taxation, the logistics of how this would work are almost unfathomable. Would officials simply tax online purchases for traditional stores like Best Buy or Walmart and exempt purely Internet-based sales on sites like Amazon and Overstock? How would they track sales for sites like eBay and Craigslist? Are they going to send revenue agents out to track each sale?  Does the state have the authority to tax beyond its boundaries? Would this have to be a federal tax, pursuant to the Constitution’s commerce clause? Does the state realize that forcing commercial activity underground only promotes organized crime? These are are just a few things to think about when contemplating such an idea. Rather than spurring the creation of a new market for illicit online sales, the government should be in the business of fostering legitimate commerce.