RALEIGH – Some of the worst ideas in politics originate with an understandable impulse.
You can understand why people might think that having government mandate a higher minimum wage will help workers, even though the policy really sticks it those whose work is worth less than the new wage and thus cannot be hired. You can understand why people might think government should erect tariff walls to protect domestic industries from foreign competition, even though the policy really sticks it to consumers and fails to help uncompetitive industries in the long run.
Here’s another example from the 2009 session of the General Assembly: North Carolina’s new click-through tax.
For years, brick-and-mortar retailers have complained about what they perceive as unfair competition from web-based vendors. Why should the former have to collect retail sales tax on their transactions while the latter don’t? That seems to make Internet shopping less expensive for no good reason. The situation seems out-of-kilter.
It’s understandable, then, that the General Assembly sought to eliminate this apparent unfairness by expanding the sales tax to include goods sold by online businesses such as Amazon and Overstock that maintain affiliations with North Carolina-based web sites.
But it was an impulsive and poorly reasoned policy.
For one thing, it’s not likely to raise the $7 million a year that lawmakers envisioned. Rather than simply capitulate to the North Carolina taxman, many of America’s largest online retailers are ending their marketing relationships with state-based affiliates. That way, their customers won’t have to pay the new click-through tax. As the Triangle Business Journal reported last week, it is likely that this phenomenon will keep tax collections below the back-of-the-envelope figure that legislative staffers calculated during the session.
More importantly, though, the concept behind the tax was fundamentally flawed.
Online or catalog retailers have long been required to collect sales taxes from their North Carolina customers if the business had a substantial physical presence in the state, such as stores, employees, or warehouses. What’s new is the state’s attempt to force retailers to charge sales tax even if they don’t have such a nexus – if their connection merely consists of a marketing affiliation with a North Carolina-based web site.
The cases aren’t comparable, however. The logic behind the nexus concept is that if a business has a substantial physical presence in the state, then its owners, employees, and customers derive benefits from government programs such as law enforcement and public education. As a result, they should shoulder an appropriate share of the cost of financing these programs, just as those who own, work for, or buy from brick-and-mortar retailers do by bearing some of the incidence of a retail sales tax.
Online retailers without a physical presence in the state don’t create a similar claim on government programs. They have no buildings to protect or employees to educate. Their products do traverse state roadways, it’s true, but those costs are already shouldered through the gas and vehicle taxes imbedded in shipping charges.
As I have argued many times, I think that the most reasonable way for policymakers to respond to the onset of online retailing is to phase out the unfair and archaic retail sales tax altogether, in favor of a simple, flat tax on all consumed income in the state. In the meantime, however, North Carolina should at least avoid killing viable online business relationships with ill-conceived new taxes.
Our state is not undertaxed. Our politicians need to stop trying to dream up new ways to chisel us and start reforming government to keep expenses in line.
Hood is president of the John Locke Foundation