Internet sales tax proposals are a penalty against states that have lower sales taxes. They are meant to reduce the desirability for a state to end sales tax and to reduce the incentive for keeping taxes simple. Further, they are an anti-competitive measure meant to reduce the growth of competition.

An Internet sales tax levied according to the buyer’s location is a disincentive for states to lower or simplify their sales taxes in order to attract businesses. Under the current system, a business can easily cut their legal costs by setting up in a state that has no sales tax or that has a simple tax. But with an Internet tax that requires every Internet business to collect taxes according to the location of the buyer, any business that does any Internet sales will still have to pay accountants to keep them in line with sales taxes in the other 49 states.

For as long as I can remember, high-tax states have complained about the “mail order loophole” that allows consumers to bypass state taxes. I have a suspicion that the complaint isn’t so much about lost revenue, but about wanting to punish states that have lower sales taxes and are thus more desirable for mail-order businesses.

Before the Internet, such jealousy was low-key, because mail order, while a big business, wasn’t nearly as big as it is now. Today, though, that desire for punishment is growing stronger.

Established retailers like sales taxes

One of the reasons that a company like Amazon could make it big on the Internet without hiring lots of lawyers is that they set up in Oregon, a state with no sales tax. Young Amazon didn’t have to worry about Oregon sales tax because Oregon doesn’t have any, and they didn’t have to worry about other sales taxes because that wasn’t their responsibility. Making it their responsibility is a way of keeping businesses out of Oregon. But it’s also

One of the reasons that a company like Amazon could make it big on the Internet without hiring lots of lawyers is that they set up in a single state. Young Amazon didn’t have to worry about sales taxes in 49 states or thousands of municipalities because that wasn’t their responsibility. Making it their responsibility is a way of protecting bigger companies from upstarts such as Amazon once was. Having to take into account fifty sales taxes—or, worse, thousands of municipalities—instead of one or none makes it more complicated to create a small business. This means that the consumer loses. The consumer loses not just because of having to pay taxes, but because there is less competition and less innovation.

I doubt that larger retailers care one way or another about an Internet sales tax. Some probably welcome it, precisely because it will increase the expense of competing with them. The price Wal-Mart will have to pay to conform with dozens of local sales taxes will be a small percentage of their business, but it will be money well spent if it discourages another Amazon from starting up. Wal-Mart may well have to handle them anyway because of its physical presence in most states.

Yet another privacy issue

Once the federal government starts collecting a sales tax for distribution to states, they will also want to be able to verify, later, that sales taxes were correctly collected. This will mean keeping track of who buys what from whom. Companies will be required by law to not only keep sales records, but to show them to tax agents with no warrant and no accountability.

Even if an Internet sales tax is inevitable, if it is to protect innovation it must be kept simple and it must allow for competition. If it is to protect the consumer, it must protect privacy.

One reason for the complexity of Internet sales tax proposals is that everyone assumes that an Internet sales tax must be based on the purchaser’s location. This is great for punishing low-tax states and for restricting competition, but the best solution is the simple solution: tax based on the seller’s location rather than the buyer’s. Every new business will know exactly what sales tax they need to charge for any sale: whatever sales tax they charge for their local customers.

Once a month, they’ll bundle up all of their sales taxes with a list of zip codes and amounts and send that to their state’s sales tax force. One sales tax to collect, one place to send it.

Each state’s sales tax force will, once a month, aggregate all of the out-of-state taxes they’ve collected with all of the zip code lists and send them to the appropriate states. There should be no direct contact between the seller and the state or local government of the place they’re sending to. No one in zip code 92103 need know that I purchased an inflatable Miss Piggy doll. They won’t even know that anyone in their zip code purchased anything from Inflated Piggies Limited. All they’ll know is that someone or some ones in their zip code paid some sales taxes to New York companies.

States with no sales tax will have it easy. They won’t have to collect anything. States with lots of sales tax will do what they always did: collect money and pass it around. Startups will not need to pay license fees and tax professionals in order to stay abreast of taxes around the country.

We’ll maintain the free market in economies that encourages innovation in the United States. We’ll maintain privacy. And we won’t discourage individuals and small businesses from competing with larger companies.