Sell globally, tax locally.(Enterprising: business as an act of creation)

The reauthorization of the Internet Tax Freedom Act (ITFA) this fall will again reignite the acrimonious debate over Internet sales taxes. A majority of states are asking Congress to extend their tax collection authority to Internet and catalog sellers, even when the seller has no store or warehouse or other business operation in the state. In my new AEI monograph Sell Globally, Tax Locally: Sales Tax Reform for the New Economy, I argue that Congress should categorically reject that proposal. I describe exactly why this is a bad idea. Then I offer a provocative alternative to this proposed expansion of the existing, deeply flawed sales tax regime: an approach that would impose sales taxes where products originate, not where they are consumed.

At present, cross-border sales, through the Internet, mail, or other channels, are commonly taxed on the basis of their destination, not the place of origin. That regime--which compels sellers to calculate, collect, and remit taxes in thousands of local jurisdictions for their sales in those areas--is uniformly decried as terribly complex, burdensome, and inefficient, it allows many Internet sales to escape taxation, depriving governments of revenues and giving Internet retailers an unwarranted advantage over traditional industries.

Many e-commerce tax reform proposals attempt to solve that difficulty through tax harmonization and interstate cooperation. I suggest those options are unworkable. To begin, state and local governments will never be able to agree on a lasting harmonization of their tax bases. And even if they did, many deep problems would remain. Any state agreement on imposing sales taxes based on the destination of the goods will amount to the creation of a tax-enforcement "cartel" among states. Such a tax cartel would undercut the potential for tax competition among states, and thus seriously erode incentives to keep taxes down.

An origin-based tax system, on the other hand, would break the tax cartel and replace it with tax competition--giving states an incentive to lower their sales taxes as a means of enticing companies to choose their state as a base of operations. Businesses located ...