Sales Tax: When ‘Animal Farm’ Meets the Metaphysical World of the Internet

Should the internet be a tax-free zone like the duty-free shops in international airport terminals? Does it make sense to subject the internet to a different set of laws than any other space?

These questions are central to the proposed Marketplace Fairness Act, which would empower states to collect sales tax from online sellers. Ahead of Congress, some states have become innovative in how they interpret the concept of "nexus" — i.e., the connection between a business and the state that legitimizes tax collection. These states have enacted what's become known as the "Amazon Tax," which increases the exposure of online merchants to the same sales taxes paid by brick-and-mortar businesses. So far, 21 states have enacted an Amazon-type law, expanding their reach to online retailers.

The debate boils down to commercial interests: physical businesses want online sellers to be subject to the same taxes they pay, and e-commerce companies want to keep their advantage. For businesses on the brick-and-mortar side, it's an "Animal Farm" situation where some businesses are more equal than others. For online sellers, the internet has been a loosely regulated frontier for so long and it seems unjust to suddenly change that. Still for others, the internet has been a loosely regulated frontier for too long, and it seems unjust to not change that.

Here's my take: taxation of online transactions is inevitable. Compared to the early days of e-commerce, there's now too much money flowing for states to ignore it, and there's no justification for it to be ignored. Assuming the internet is nothing more than a vehicle for communication and transferring information — and not a new metaphysical frontier — there's no reason for it to receive preferential tax treatment. From a business and compliance perspective, the evidence also suggests that online merchants will do just fine with this adaptation. The fact is that many online businesses collect taxes and manage a viable business.