Why Jon Stewart is Right about Taxes

December 9th, 2011

In 1992 the U.S. Supreme Court made a decision that directly affected the profitability of future powerhouse online retailers like and In Quill v. North Dakota, the Court ruled that retailers who have no physical presence (or “nexus”) in a state are exempt from collecting sales taxes in that state. Obviously internet shopping in 1992 wasn’t what it is now. Actually the case dealt with a catalog mail-order company, but online retailers now use the rule to avoid sales taxes.

Of course since e-commerce sales have soared and displaced business of local retailers, this ruling has become am increasingly thorny budgetary problem for states.  According to a study at the Universityof Tennessee, yearly e-commerce sales rocketed from $995 billion in 1999 to an estimated $4 trillion in 2011. These conditions also give online retailers like Amazon and Overstock a pretty nice advantage over the general store down the street, since in some states sales taxes amount to nearly 10% of the purchase price. Or as Bill Dombrowski, president of the California Retailers Association, put it: “You can’t give one segment of retail a 10% discount every day. It’s just not fair.”

This has become a particularly thorny problem for California—the state with the highest sales tax in the nation. In a debate which has become nationally symbolic, California has a projected $25.4 billion budget shortfall this year, which is nearly the size of the total general fund budget of Delaware, Idaho, Maine, Montana, Nebraska, Nevada, New Hampshire, North Dakota, Rhode Island, South Dakota, Vermont and West Virginia…combined. According to the University of Tennessee study I cited earlier, California lost an estimated $1.4 billion in sales tax revenue to e-commerce in 2010 alone.

To address this problem, California passed a law in July that requires out-of-state online retailers to collect sales taxes on purchases from California customers. Governor Jerry Brown called the law “common sense.” Amazon called it “counterproductive.”

But Amazon has decided to fight back. It recently launched a campaign to push a voter initiative in California that would effectively roll back the new law, eliminating sales tax for online retailers with a small physical presence in the state. Paul Misener, Amazon’s vice president of global public policy, framed the initiative as a benefit for all Californians: “Californians deserve a voice” he said “and a choice about jobs, investment and the state’s economic future.” Wait…Californians deserve a voice? Or Amazon does?

Nancy F. Koehn, a retail historian at the Harvard Business School, has observed that it might send the wrong message if “companies can fund a political campaign for a referendum and maybe your customers won’t be subject to sales tax.”

As Jon Stewart and John Oliver pointed out on The Daily Show this week, there is a certain irony to allowing to shape taxation law for its own benefit. Oliver sarcastically called it “democracy at it’s finest.” And it’s true. I am against corporations resizing their own tax burden either legally (though a referendum) or illegally (through tax evasion or corruption). Of course legislators should consider economics when shaping fiscal and taxation policy. But that is very different from a single company, or group of companies, manipulating a tax policy to their benefit. While this case may lie in a legal gray area, it does not lie in a moral one. Taxation manipulation is wrong. Period.

Written by Ann Hollingshead

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