Late last month, a New York Court of Appeals ruled that the state of New York can force online retailers such as Amazon.com and Overstock.com to collect sales taxes, even in states where the retailer does not have a physical presence. This sets up a potential showdown at the U.S. Supreme Court because this ruling conflicts with an earlier Supreme Court decision stating that states cannot force retailers to collect sales taxes in which they are not located.
If the Supreme Court rules that states can impose an online sales tax, expect to start paying more. In Missouri, the Senate approved a bill that would force online retailers to collect sales taxes; the House is considering the proposal now.
I have been going back and forth on the prospect of paying sales taxes on my Internet purchases. I am sympathetic to proponents’ arguments that say the tax code should not favor one type of business over another.
However, these types of taxes can be really complicated. There is also a decent chance that they will not generate much money. After one study in Illinois estimated that the state would collect $153 million, it turned out that after instituting a tax on e-commerce, it was on track to collect just $6.4 million from the tax, a mere 4 percent of the original estimate (hat tip: Illinois Policy Institute) .
Again, I am sympathetic to the idea of ending tax preferences in the tax code. However, if the cure is worse than the disease, which these types of taxes are starting to look like, the state should take a pass.
