On Friday, California Governor Jerry Brown signed a bill into law that requires large out-of-state online retailers to collect sales tax on purchases that California customers make on the internet. Although Brown calls this “a common sense measure,” the trend of cash-strapped states' finding new ways to tax simply deflects the problems of spend-happy state governments away from themselves and drives businesses away.
Before this law, consumers did not pay any sales tax to California because internet retailers like Amazon and Overstock.com did not charge them. But Brown — presiding over a government that is billions in debt — claims this tax will raise $317 million in state revenue. However, it does not come without the predictable consequences of imposing new taxes.
Some 25,000 “affiliates” in California, who benefit from companies like Amazon’s horizontal and interdependent business structure, will have to move to another state if they want to continue earning commissions for referring customers. Even though these “affiliates” are mostly small companies, who paid a total of $152 million in state income taxes last year, California wants more. From Lab26 Inc. in Cupertino, which manufactures Kindles, to the owner of a 12-year-old small photography website, it is a question of where (not if) these businesses will move.
Like nearly all coercive government regulations and taxes, this new tax was lobbied for and heavily supported by large non-internet based companies, like Walmart, Target, and Best Buy; they are upset about the supposed unfair advantage. Instead of finding new ways to compete in the marketplace, they would rather stifle competition.
"You can't give one segment of retail a 10% discount every day. It's just not fair," said Bill Dombrowski, president of the California Retailers Association, a major player in a coalition of large and small stores supporting the legislation.
This law represents one of the conundrums of taxation and revenue predictions in this increasingly mobile world. The higher the tax rates go, the more incentive businesses have to “vote with their feet,” and set up shop in freer economic areas.
And good for the businesses that are refusing to pay to what amounts to extortion fees from the state. Amazon correctly calls this “unconstitutional and counterproductive” and Apple CEO Steve Jobs recently refused to give in to the Cupertino city government’s Mob-like shakedown.
Corporate lobbyists like Dombrowski, who want Congress to follow the example of California and six other states, make taxing internet sales a national issue. They not only have a U.S. Supreme Court’s ruling in their way, but also state-by-state economic numbers. Businesses and people are flocking to freer, low-tax states like Texas and Florida. States like New York and California, that squeeze everything they can out of their citizenry, are witnessing capital flee. This taxation is immoral since it is the initiation of force, the equivalent of organized theft. In an environment where many can avoid taxes by moving, raising taxes is a futile strategy for states.
Since its creation, the internet has been the most revolutionary and powerful institution precisely because it is largely unregulated and unmanaged by states. It is a great example of the complex and spontaneous order of the market. To tax and control it is to affront the essence of the organic and constantly-improving structure of the web. California (and other state governments) may have their eyes on the amazing wealth that is the internet, but I suggest they look in the mirror at their own problems and corruption instead.
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