Internet commerce is among the fastest, if not the fastest, growing sector of the American economy. It is also relatively free of regulation and taxation, but there are some people in Washington, D.C. who have been aiming to change that for years through a so-called "Amazon tax," an Internet sales tax that can be applied to all transactions, even when buyers and sellers transact across state borders.

Under current law, there is no national sales tax on Internet transactions, and the Supreme Court has consistently ruled that no state may levy taxes on businesses that do not have a physical presence because it violates the due process clause in the Fourteenth Amendment. This means a furniture store in Michigan that sells a product online to a customer in California cannot be forced to collect sales taxes by the government of California. Other court rulings suggest it is an "unreasonable burden" to require businesses to collect taxes and comply with so many jurisdictions.

Understandably, this seems unfair to furniture stores in California, which must apply an effective sales tax rate of 7.5% to all of their products. Customers in California might get a better deal by shopping online and sending their money to Michigan, or another jurisdiction, rather than paying extra taxes to shop in their own state. This is the very claim made by proponents of an Internet sales tax; it is necessary to provide a level playing field between giant Internet companies and main street.

Opponents of the Internet sales tax are varied in their responses. The most common refrain is any such tax crushes the thin margins made in online transactions and applies breaks to one of the bright spots in the American economy. Others point out that online sellers already pay a bevy of taxes, and forcing an online business to apply taxes for sales to the residents of another state does not make any more sense than applying special taxes for main street transactions between a business and customers who happen to be visiting from out of town.

There is also the compliance nightmare of trying to force compliance across 9,600 sales tax jurisdictions in the United States, although some contend that sales taxes are already harmonizing across the country in the name of simplicity and the Streamlined Sales and Use Tax Agreement (SSUTA).

The oldest argument, however, is that such a tax is a modern-day taxation without representation, since businesses cannot vote on tax issues in states in which they do not reside. This argument was considered in the Supreme Court's decision in Quill Corporation v. North Dakota (1992).

Size of the Interstate E-Commerce Industry

Internet sales are a sizable part of the U.S. economy. The U.S. Census Bureau estimates that total online retail sales in Q2 2015 were $1.17 trillion, up 1.6% from Q1 2015. More than 15.5 million Americans are either employed or self-employed in the online retail trade industry. For the most part, these are not employees earning huge salaries; average hourly wages for online retail workers were roughly $17.50 in July 2015.

Possible Positive Effects of Internet Sales Tax on Interstate Commerce

No matter how large the online sales sector, American communities are still full of local brick-and-mortar stores, and local companies continue to provide employment opportunities for millions. Those stores have to collect sales taxes from their customers in 46 states, which drives up their prices. Even big box retailers such as Walmart and Best Buy, companies that compete with Amazon and eBay in every state, have to apply sales taxes on goods in their physical locations. Improving local brick-and-mortar sales is unlikely to benefit interstate commerce directly, however, since the vast majority of sales are local.

It is difficult to construct a traditional economic argument in favor of additional taxation on a thriving industry except in two clear cases. The first is that an online sales tax levels the playing field. The second, perhaps roundabout argument, is that states are losing out on tax revenue by not collecting sales taxes. This conceivably means less government spending on roads and bridges, which helps facilitate interstate commerce via delivery trucks, etc.

Possible Negative Effects of Internet Sales Tax on Interstate Commerce

Taxes drive up the cost of goods and services, and higher costs mean less demand. The most obvious impact of the Internet sales tax is reducing the interstate commerce that takes place online. Given the very slim margins, as the Harvard Business Review estimates the average operating margins for large online retailers is often below 2%, job losses are also possible. Just as serious, however, is the prospect of further concentrating power in the hands of a few huge online retailers at the expense of smaller retailers.

Most people are surprised to hear that Amazon has lobbied extensively in favor of the Internet sales tax, since the tax would ostensibly affect its business more than anyone else. While Amazon claims it supports the tax in the name of fairness, the more likely answer is Amazon knows it actually provides a competitive advantage; complying with sales tax laws in 9,600 jurisdictions is far less difficult for Amazon than many of its smaller competitors who do not have the same resources or legal expertise. Additionally, Amazon has physical locations in many states, meaning it already collects lots of sales taxes.

Websites such as eBay and Etsy, which are decentralized masses of small, individual sellers, would likely be strained by an Internet sales tax in ways that Amazon would not. Unsurprisingly, eBay is one of the most outspoken opponents of the legislation.

This problem is sometimes called "regulatory capture" by economists; huge corporations with lobbying power and large accounting and legal teams try to impose costly regulations that affect smaller competitors more intensely. Amazon's intentions may appear benign, but it is ultimately looking to choke off rival websites.

There is one other potential lasting impact of a new Internet sales tax:; it could discourage up-and-coming entrepreneurs from establishing online-based retail sales operations, because the environment will no longer be as economically attractive.