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Gazette Premium Content FAGIN: Get a handle on Internet sales tax

By BARRY FAGIN Columnist - Published: May 9, 2013

This week, I am ashamed to say, the U.S. Senate passed bill 743. It's supposed to be cited as the 'Marketplace Fairness Act of 2013. ' But if I called it that, I'd be violating every principle of integrity I claim to stand for. Lying is lying, regardless of who does it.

The rationale for the law is pretty simple. Businesses collect sales taxes for the states where they are located. Long-established legal precedent requires something called the 'nexus test, ' used to determine whether or not a business is considered located in a state and therefore required to collect sales tax. Physical presence is pretty straightforward to figure out, so this worked fine for a long time.

Then the Internet was invented, and with it online commerce. With a click of a mouse, you could buy something from a company thousands of miles away with no presence in your state at all. Ergo no sales tax.

This upset a lot of people, but technology has a way of doing that. An Internet luminary once quipped 'The Internet treats censorship as damage, and routes around it. ' I would argue that, to the Internet, taxation is just another form of censorship.

It is true that the present system is unfair, although the degree of unfairness is unclear. People don't buy online to save a few bucks on sales taxes. They buy online because it's convenient, because they can do it in their pajamas on a snowy day, and because it eliminates the middleman. Forcing Florida businesses to collect California sales tax won't change that.

But if you're bothered by the tax fairness problem, there is more than one way to solve it. You could grant in-state retailers sales tax relief. You can get spending under control to reduce 'revenue enhancement ' pressures. You can move to an origin-based system of sales taxation. 'Tax fairness ' doesn't have to be achieved by taxing group A more. It could be achieved by taxing group B less.

Nor is tax fairness the only value to be considered. What about tax competition? Tax competition is one way to keep state government budgets in line and is an important part of our federalist system. But SB 743 puts yet another nail in that coffin. It creates a de facto tax cartel.

Under this bill, the only way state governments can determine how much taxes they are owed is to share information about transactions outside their borders. The bill includes provisions that would allow state governments to gather data connecting customer addresses with customer purchases and agree to share it with each other to determine how much tax to collect. Indeed, to comply with its objectives, they wouldn't have any choice. Any incentives for states to compete with each other through lower tax rates goes out the window.

And did I mention the privacy problems? Do you really want some state Department of Revenue knowing about that lacy little thing you ordered from victoriassecret.com? Would you trust them to keep your credit card number safe, just because, well, they're supposed to?

Fortunately, there's a better way. I'm confident House Republicans will grow spines and kill this thing. But that doesn't mean we should ignore the problem. Colorado should move its sales tax system in the opposite direction of Senate Bill 743. Instead of becoming increasingly destination-based, we can move to origin-based sourcing. Collect Colorado sales taxes on sales that originate in Colorado, and stop worrying about where the customer lives or where the product is going. Do so at a uniform, low rate. Get a handle on spending. Be a role model for other states to do the same.

Or give up your privacy, your wealth and a little bit of your liberty, in the name of 'tax fairness. ' Colorado, it's your call.

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Barry Fagin is a Senior Fellow in Technology Policy at the Independence Institute in Denver. His views are his alone. In 1996, he received the ACLU National Civil Liberties Award for his work as a plaintiff in a Supreme Court case that established First Amendment protections for the Internet. Readers can contact Dr. Fagin at barry@faginfamily.net.

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