Companies Battle Over Internet Taxation

Monday, 02 May 2011 09:06 AM

By George Will

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Tim Storm, an Illinois businessman until a few weeks ago, is now a Wisconsin businessman. Herewith a story about how states can reduce revenues by trying to increase them, and about the economic benefits of federalism.

Storm, 42, is founder and CEO of FatWallet.com. The company, until recently one of about 9,000 Illinois "affiliates" of Amazon.com, directs online shoppers to online retailers, which often pay affiliates commissions for referrals that result in sales. Storm's company, which has 54 employees, used to be located in Rockton, Ill., but now is five miles up the road in Beloit, Wis.

One reason online sales are brisk is that the retailers are not required to collect state sales taxes. In 1992, the U.S. Supreme Court held that such taxes must be collected only by companies that have a "substantial nexus" — basically, a brick-and-mortar presence — in the state. Under this rule, Amazon collects sales taxes in only five states.

Illinois, comprehensively misgoverned and ravenous for revenues, has enacted what has come to be called an "Amazon tax." It requires Amazon and other online retailers to collect the state's sales tax. Amazon and many other retailers responded by severing their connections with their Illinois affiliates.

Storm responded by relocating in Beloit. No one knows how many other Illinois affiliates of the thousands of online retailers — transactions with Amazon are less than 1 percent of FatWallet's business — will lose revenue, pay less in taxes, cut jobs, or leave the state. When Texas sent Amazon a bill for $269 million because of the "nexus" of its Dallas warehouse, Amazon decided to close the warehouse.

Hoping to turn the states' budget crises to their advantage, Wal-Mart, Target, and other large retailers are funding a coalition called Alliance for Main Street Fairness to lobby for measures — perhaps federal legislation — to require Amazon and other online retailers to collect sales taxes. This supposedly would serve fairness by leveling the playing field.

Most online retailers would, however, retain the advantages of convenience — shoppers do not need to drive to the store — and the price advantages of not having to pay the cost of brick-and-mortar stores. But the stores have the competitive advantage of local loyalties, and customers being able to handle merchandise.

Besides, Main Street stores pay sales taxes to support local police, fire and rescue, sewage, schools and other services. If Amazon's Seattle headquarters catches fire, will Champaign, Ill., firefighters extinguish it? And as Boston Globe columnist Jeff Jacoby notes, "A Pennsylvania tobacco shop doesn't collect Ohio sales taxes whenever it sells a humidor to a visitor from Ohio."

Federalism — which serves the ability of businesses to move to greener pastures — puts state and local politicians under pressure, but that is where they should be, lest they treat businesses as hostages that can be abused. According to the Tax Foundation, Illinois has not only the fourth-highest combined national-local corporate income tax in the nation, but also in the industrialized world.

In Peoria, Doug Oberhelman, CEO of Caterpillar, has told Illinois Gov. Pat Quinn that he is being "wined and dined" by other governors and their representatives encouraging Caterpillar to invest in their states.

It recently picked Muncie, Ind., for a major manufacturing plant. Says Indiana's Gov. Mitch Daniels of his neighboring state, "It's like living next door to 'The Simpsons' — you know, the dysfunctional family down the block."

A study by the Illinois Policy Institute, a market-oriented think tank, concludes that between 1991 and 2009, Illinois lost more than 1.2 million residents — more than one every 10 minutes — to other states. Between 1995 and 2007, the total net income leaving Illinois was $23.5 billion.

The five states receiving most refugees from Illinois were Florida, Indiana, Wisconsin, Arizona, and Texas. Two are Illinois' neighbors, three have warm weather, two — Florida and Texas — have no income tax.

In January, a lame-duck session of Illinois' legislature — including 18 Democrats who were defeated in November — raised the personal income tax 67 percent and the corporate tax almost 50 percent. This and the increase — from 3 percent to 5 percent — in the tax on small businesses make Illinois, as The Wall Street Journal says, "one of the most expensive places in the world to conduct business."

Tim Storm's presence in Beloit demonstrates how American federalism gives force to a familiar axiom: Businesses go where they are welcome and stay where they are well-treated.

George Will's email address is georgewill@washpost.com.





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