Questioning online sales tax

If you used to be a frequent Amazon buyer since they never ask you for sales tax, then your happy life may burst. According to a piece of recent news from the Economist, California has started to collect sales tax from Amazon, the worlds’ biggest online retailer . Congress also begins to pass laws to allow state governments to impose sales tax.

If government begins to charge sales tax from online retail, California will get $250 million and $500 million tax revenue a year . It looks like a really big cake for state governments which are in difficult financial situation. However, I would argue that it is unwise to collect sales tax from online retailer. Government should protect online retailers rather than hurting the online retail economy.

You may notice that physical retail stores have complained that skipping sales tax let online retail constitute unfair competition towards them. A top executive from the National Retail Federation said that “stores do all the work, and then online competitors steal the sale because they don’t have to charge state and local sales taxes.”  However, this is not true. Compared to physical retail, online retail sales is still in a very small proportion of the national retail sales. According to the Harvard Business Review, “only about 9% of U.S. retail sales are online today, and that rate is growing at only about 10% a year.”  Although online retail has many advantages, physical retail to be still remains to be people’s primary choice. Moreover, many online retailers are individuals or small business, especially for those on eBay. Changing the tax would greatly change the business environment they used to have. Collecting sales tax will greatly impact the online retail environment since online retail is still in its infancy.

What is behind the secret of online retail having a lower price and better service? After removed traditional links, online retailers can have higher asset turnover rate, which means their goods do not have to wait in the store for a long time. Online retails also consume fewer resources. For example, an online retailer does not need to build physical retail store and only need a single warehouse. Physical store is not necessary for online retail, and they can sell items through the internet to national-wide even world-wide. Thus, online retail is a far more efficient than traditional retails. This new kind of economy Online retail is a form of commerce, not economy will benefit our society in long run much more than the physical retail. But as I mentioned before, online retail is still young and fragile, it would be necessary to provide preferential policies in order to encourage the development of online retail.

Since most of the online retail sales are interstate business, the sales tax would reduce the efficiency of interstate transaction and give no benefits to our economy. If our policy makers know that tariff will hurt free global trading, they should also notice that collecting sales tax on out of state online retailers is a another form of local protectionism.

In brief, for these reasons, online retail should be given tax-free in order to encourage the development of this efficient form of economy.