TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, May 14, 2018

Is Trump’s Tax Incoherence Just A Way To Hurt Amazon?

Amazon logoNew York Times op-ed:  Is Trump’s Tax Incoherence Just a Way to Hurt Amazon?, by Veronique de Rugy (Mercatus Center, George Mason University):

For months, the Trump administration has rightfully been trying to thwart attempts by some European governments to impose a new corporate “digital tax” on American high-tech giants. This campaign to block internet-inspired extraterritorial taxation — taxation of income earned outside of a jurisdiction — is strongly supported by the American business community. But the White House, in an odd twist that turns its European Union digital tax arguments upside down, just argued before the Supreme Court that the same kind of extraterritorial taxation is acceptable when carried out by American states on retail sales on the internet.

Does the left hand of the Trump administration know what the right hand is doing on internet-related tax policy? Are American corporate leaders who have ignored the issue of internet sales taxes about to suffer a key setback in relation to the European Union tax grab? And does sound tax policy go out the window if the president seems to think Amazon is in the cross hairs?

The implications of tax policy for internet business models is important: Many enterprises, large and small, are adopting a range of internet-enabled services. Good principles of taxation are the same at the state, national and international levels. They include the idea that each state or country has carte blanche to tax income, sales and whatever else it wants within its borders (as long as its taxpayers are O.K. with the burden), but they should not step on the toes of other political jurisdictions by taxing activity that happens across the border. Given the eternal lure of governments to tax people who can’t remove them from office (remember the old “No taxation without representation” mantra?), this is a timeless concern.

This is the issue at the heart of the Supreme Court case South Dakota v. Wayfair, a multibillion-dollar retailer with no physical facilities in South Dakota that is using the internet to serve South Dakota customers. If South Dakota were to win this case, extraterritorial taxation would be allowed by states. Retailers would be forced to abide by every state’s in-state sales tax laws regardless of whether they have any in-state business operations. This has been a goal of states for over 50 years, and it’s the third time the issue has reached the Supreme Court. The result of the last visit, in 1992, is referred to in tax circles as the Quill decision. ...

An administration that did not protect small businesses from extraterritorial internet tax claims in the Supreme Court still aspires to protect the largest United States companies from the same kind of tax policy revisionism in Europe. The issue at hand is a European Commission proposal to impose a new 3 percent tax on the gross revenue of large firms that engage in a range of commercial internet activity in Europe.

What accounts for such an incoherent approach to tax policy? The administration argues in the Supreme Court that the borderless nature of e-commerce should subject someone selling potholders on Etsy or vintage Air Jordans on eBay to taxes in every state — but then it opposes European governments using the same rationale to tax billions in revenue by the largest American multinationals.

Are small retailers using the internet being lost in the haze of Mr. Trump’s public hostility to Amazon and Jeff Bezos? ... [But] a win by South Dakota will not undermine Amazon. Its national distribution network means it must collect sales taxes in every state. New rules are likely to help the company by increasing burdens on lesser-equipped small competitors. Justices Elena Kagan and Stephen Breyer both hinted at this during oral arguments, noting that expanding tax duties on the legions of smaller businesses would be likely to benefit the largest online businesses and exacerbate concerns about dominance by the few internet giants.

The internet is global. It’s not going away. Governments everywhere want to increase their power to tax internet commerce out of a fear that some tax revenues will go the way of music CD sales and newspaper classified ads. Mr. Trump may think he’s changing the rules to increase Amazon’s tax bill and help states raise more revenues, but if he succeeds it will lead to many American technology companies writing much bigger tax checks to foreign governments for years to come.

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If Trump thinks he's hurting Amazon by opposing Wayfair, he's got things tragically backwards. There is a reason Amazon isn't a party to the case: They already collect sales tax on a nationwide basis. And making the little retailers do the same only helps Amazon -- both from a competitive point of view and because the little guys likely will have to hire Amazon to administer nationwide collection for them!

Posted by: Matt | May 17, 2018 3:19:02 PM