Taxation without representation: tax-hungry states go after out-of-state retailers.

• Author: de Rugy, Veronique
• Position: Columns

AMAZON.COM WANTS to make a deal with the state of Texas: no sales tax collection during the next four and a half years in exchange for 5,000 jobs and a $300 million investment to open distribution centers where those employees would work. South Carolina recently accepted a similar, smaller offer from the online retailer.

California this June, meanwhile, effectively closed down Amazon's "Affiliates" program, which pays a commission to websites that link to Amazon in the state, by insisting the bookseller pay sales taxes on any transaction referred from a California-based website. The move followed similar actions in Arkansas and Connecticut.

These are just the most recent skirmishes in a decade-long battle between Amazon and officials in various states over taxing online purchases. Now some in Congress, notably Sens. Dick Durbin (D-Ill.) and Mike Enzi (R-Wyo.), want to give the whip hand to state tax collectors with the so-called Main Street Fairness Act. The bill would allow states to impose taxes on interstate commerce, something usually blocked by the Commerce Clause of the U.S. Constitution.

Many policy makers and journalists view the debate over Internet taxes in narrow terms. They believe the fight is about whether or not federal, state, or local legislators should "tax the Internet." Consequently, the war of words has focused on competing bumper-sticker slogans such as "Don't Tax the Net" and "Level the Tax Playing Field." But framing the debate that way understates the complexity--and importance--of the issue.

The no-taxes side largely ignores the fact that the Internet isn't really a tax-free zone. It is true that, thanks to the 1992 Supreme Court decision Quill v. North Dakota, states can collect sales tax on online purchases only if the retailer has a physical presence in that state. If a Virginia resident buys a book from Amazon, which is based in Washington state, he pays no sales tax. But if he buys the same book from store in Virginia, the transaction is taxed. Likewise, Amazon consumers living in Washington have to pay in-state taxes.

Furthermore, many state governments technically oblige their residents to remit a "use" tax on any goods they purchase out of state. A California resident who buys a computer in sales-tax-free Oregon, for instance, is expected to send the Golden State's Board of Equalization a check for an amount effectively equal to 7.25 percent (California's sales tax rate) of the computer's price. But such...