Subsidizing E-Tailers: What Will They Do Without State Tax Dodge?

You can always tell that an industry has come of age when it conjures up a public policy issue to take to Washington. By this measure, I figure the e-commerce business has just had its bar mitzvah.

The e-tailers’ cause is taxation, always a fan favorite in the nation’s capital. As anybody who did any online shopping in the recent holiday season knows, most such purchases are free of state sales tax; in fact, the feeling of putting one over on the state tax man is a big part of online shopping’s charm.

This break comes about largely courtesy of the federal government, which has given Amazon.com and its fellows a three-year bye on sales taxes. At the time it enacted this moratorium, which expires in 2001, Congress also established a blue-ribbon commission to study the issue and report this April, thus extending a debate guaranteed to attract lobbyists the way a kennel attracts fleas.

It shouldn’t be surprising that the taxation issue is viewed as a life-or-death matter by e-tailers.

After all, the principal value they offer shoppers (aside from “convenience,” which is debatable) is price. For all the claims that online shopping is so efficient that lower prices are inevitable, the truth is that once the shipping cost of your Amazon.com book or Gateway computer is factored back in, it’s the sales tax break that accounts for much of the price advantage.

The e-tailing lobby has dressed up this quintessentially dollars-and-cents issue in all the finery of mom and apple pie. “How can you even consider taxing the Internet?” Jeff Bezos, Amazon.com’s founder, blustered during a visit to The Times a couple of weeks ago. He argued that A) electronic commerce still amounts to a tiny portion of the total U.S. consumer economy and B) a tax regime would throttle its growth before it has a chance to clamber from the crib.

Bezos’ appeal was for the government to wait another three years before taxing online transactions so the sector gets a chance to grow into something truly substantial. This is a familiar dodge in Washington: If you put something off long enough, then a temporary measure begins to look like tradition, like those Christmas lights you never bother to take down. One can imagine the initiation date of e-commerce taxation receding endlessly into the distance--something like profitability projections for Amazon.com.

Bezos’ argument also confuses technology with transaction, a distinction I’m sure he understands better than he wants us to believe. No one in this debate is proposing taxing the Internet per se, to the extent that would mean taxing Internet access or the networks that carry digital data. The issue is retail sales, which are essentially identical transactions whether they’re executed in person, by mail, by phone or by Internet.

Here’s another red herring. Many opponents of e-commerce taxation argue that it’s unconstitutional, on grounds that the Commerce Clause of the U.S. Constitution forbids one state from levying taxes in another. But California’s taxing an Internet transaction done between a consumer and, say, L.L. Bean is not the same as taxing L.L. Bean, any more than taxing a purchase at the Gap store in Beverly Center means taxing the Gap.

In both cases the tax is paid by the consumer. The only real difference is that while California can send an inspector around to Beverly Center to make sure the store collects the tax and ponies it up, its reach doesn’t extend all the way to L.L. Bean’s headquarters in Freeport, Maine. In many states, California included, consumers are on their honor to pay sales tax on mail-order and online purchases anyway; but we all conveniently forget this at tax time. (If the tax itself were really unconstitutional, why would we need a congressional moratorium?)

Then there’s the notion that the Internet’s role in economic growth should be rewarded by a tax break. No study I’ve ever seen suggests that consumer purchases on the Web will necessarily be incremental--that is, sales that wouldn’t have existed at all if not for the Web, as opposed to sales that simply migrated from brick-and-mortar retailers to electronic merchants.

Nevertheless, the anti-tax lobby behaves as though taxing Internet commerce would be an act of national ingratitude. Here, for example, is Paul Gigot, writing on the editorial page of the Wall Street Journal:

“As for tax revenue, states are rolling in it, thanks in part to the Internet boom. . . . New e-taxes would slow the growth of the very business helping to pile up these [tax] surpluses.”

This is plain vanilla anti-tax rhetoric masquerading as technological savvy. It’s fair to say that the Internet has led to increased tax revenue in certain states where a lot of e-companies contribute to local economies, like California and Washington. But what about Iowa? Nebraska? Idaho?

Anti-tax crusaders ridicule the notion that a large-scale shift of consumer purchasing to online retailers might put a real dent in these states’ services, but what’s so implausible about that? In some states, every book that’s bought on Amazon by a local resident might mean a buck or two of sales tax revenue that vanishes from the state budget. If e-commerce really has the potential to become as big as its backers contend, sooner or later these evaporating dollars will add up to real money.

Here’s Gigot again: “Maybe states will find they can no longer justify 8% or 10% sales tax rates, or that they can raise as much with a 4% rate from a bigger economic pie.” Of course, if a large slice of that pie--the online part--has to go entirely untaxed, then keeping revenue level while lowering rates will be quite a feat.

Gigot’s words demonstrate that what should be an issue of basic fairness has become wrapped up in a jihad against the whole tax system. Apparently some conservatives feel they can strike a blow for “tax freedom” by starting with the Web. (The bill enacting the three-year moratorium was titled, more wishfully than scrupulously, the “Internet Tax Freedom Act.”)

These are the same guys, by the way, who complain that the worst thing about the American tax system is that it goads people into making tax-advantaged choices that distort economic fundamentals. But what about giving consumers a tax incentive to buy goods from one retailer over another solely on the basis of the technology used to close the transaction?

If the moratorium persists, moreover, the distortions will only multiply. One thing I’m sure the e-tailers love about the tax break is that it tends to drive big-ticket purchases onto the Web in greater volume than small purchases.

Consider the math: If you buy a book from Amazon for twenty bucks, you’ll save $1.65 in sales tax (assuming you live in Los Angeles, where the tax is 8.25%) but pay $3.99 for shipping: no savings there. But if you buy a $200 computer scanner from Amazon, on which the shipping fee is $9.45, you’ll save $16.50 in sales tax, for a net gain of $7.05.

The differential increases with merchandise that’s more expensive and less bulky, like software. If you buy Microsoft Office 2000 from Amazon, you’ll pay a list price of about $500, plus only $4.99 for shipping--but you’ll evade a healthy $41.25 in sales tax. Bezos may claim he’s defending a nascent technology, but at heart he’s making a bid for some of that business.

The point here isn’t to debate what the proper level of sales tax should be, who should collect it, or whether we should or shouldn’t have any taxes at all. There will always be a cadre that maintains that all taxes are bad and the tax-collecting bureaucracy is inherently evil. This debate will always be with us, like the poor. (To paraphrase the late economist Herbert Stein, whatever the level of taxation, those who pay the top rate invariably think it is too much.)

But if there are politicians and businessmen out there who think the growth of e-commerce should be publicly subsidized, let them stand up and be counted. Here’s my proposal: Let’s award every e-commerce site a federal and state grant proportional to its total sales. Amounts to the same thing, right? It will line the pockets of e-commerce entrepreneurs, no doubt making them so grateful that they’ll voluntarily pass the grants on to their customers by cutting their prices accordingly.

I’m calling this the “Internet Anti-Obfuscation and Honest Dealing Act of 2000.” Do I have a second?

Times staff writer Michael A. Hiltzik can be reached at michael.hiltzik@latimes.com.