Robber Barons, Main Street, and the Sales Tax Ruling

Interstate sales taxes will only hurt small businesses.

In a long-awaited and, now, roundly lamented ruling, the Supreme Court has decided that states do, after all, have the power to force online stores at the other end of the country to collect and remit taxes on sales made to their longsuffering residents.

On the one hand, this seems fair.  A store in your town has to extract sales taxes from customers; why shouldn't a store elsewhere, that ships you goods by mail?

On the other hand, there's a deeply unfair aspect.  Your hometown store is consuming public services from police protection to judicial enforcement; a store a thousand miles away doesn't use any local services except the roads, and those are paid for by taxes on UPS delivery vehicles.

The theory is that the tax is on the state resident - the purchaser - not the store, and so where the store is located is irrelevant.  If only this were true!  For the libertarian, the worst effect of this decision will be that it strips away tax competition between states.

For the past twenty years, greedy states and local governments have been effectively limited in their ability to impose confiscatory sales taxes on most goods because if the rates exceeded the effective shipping, their taxpayers would simply order goods online and have them sent in, avoiding the tax.  Now, an unhappy taxpayer must actually move their residence to a different jurisdiction, which is a much greater challenge.

Given that the Constitution grants to Congress the power to regulate interstate commerce, it's theoretically possible that Congress will pass a law forbidding states to require out-of-state companies to collect local sales taxes.  Given the number of tax-happy Democrats still in office, we won't hold our breath waiting for this to happen.

So, what will be the changes in the world we now live in?  Will it end the Internet as we know it?  Those who support this decision are celebrating that their beloved local brick-and-mortar store will no longer be suffering unfair competition from afar and that all will have to pay whatever sales taxes their local rulers choose to impose.  To hear them rejoice, one might expect a resurgence of the classic American small-town Main Street, filled with independent small businesses owned by local families who live in the apartment upstairs.

If that were actually going to happen, this decision would be welcome.  Alas, it won't, because the Supreme Court has no understanding of business in the modern Internet era.  Indeed, they don't even understand the history of business during the robber baron era a century ago.

Bigger Always Wins

If our modern ill-educated populace even thinks about the Gilded Age of the late 1800s, they probably envision a time of profound inequality and injustice, where greedy and rapacious capitalists stole from their longsuffering and un-organized workers.

As far as the inequality, they're right: the industrial era did indeed lead to the creation of vast fortunes, just as the Internet era has.  And, as with all eras, the vast majority of people don't become plutocrats no matter how gifted or industrious they might have been.

Justice in economic terms can't be determined by equality or the lack thereof. Yes, the robber barons became immensely wealthy.  But everybody else did too, compared to their own grandparents.

How was this possible?  Because, contrary to the teachings of Karl Marx, the capitalist managerial class do provide a service of great value.  They create business organizations with economies of scale allowing the prices of everything they touch to be lowered.

Consider the arch-monopolist, John D. Rockefeller and his Standard Oil Corp.  He was hated by his competitors because he was able to out-compete and eventually buy them out.

The ordinary purchaser of petroleum products didn't hate him nearly so much, and for a very good reason: As Standard Oil grew, the retail price of petroleum plummeted:

Its output and market share grew as its superior efficiency dramatically lowered its refining costs (by 1897, they were less than one-tenth of their level in 1869), and it passed on the efficiency savings in sharply reduced prices for refined oil (which fell from over 30 cents per gallon in 1869, to 10 cents in 1874, to 8 cents in 1885, and to 5.9 cents in 1897). It never achieved a monopoly.

Think about your personal experience with such massive corporations as Wal-Mart and Amazon: Were prices cheaper before they came to town?  Was service better?  Did you have a wider range of selection?

Of course not!  For the ordinary consumer, Wal-Mart and Amazon are nothing but blessings.  Amazon isn't always the cheapest source, but they sell darn near everything and their returns policy is without peer.  Wal-Mart doesn't stock nearly such a wide range, but if they do have what you want, they are virtually always the cheapest and you don't have to wait for delivery.

Your humble correspondent distinctly remembers the execrable service at our local Zayre's before Wal-Mart came to town and put them out of their misery.  Our local mom-and-pop stationery store had lovely service and sweet people, but pens cost $6.  All Americans are better off thanks to the vast purchasing power and efficiency of these giants.

Modern business academia likes to talk about how "network effects" make it inevitable that the biggest company in any Internet-related field will tend to squeeze out all others, but that phenomenon has been observed for a century at least.  The plain facts of history show that companies will inevitably grow as large as they can, stopped only when they become so large that they can no longer be run effectively.  Then they start to stumble and fall to smaller, more nimble competitors that, in their turn, overgrow and become sclerotic.

Thus Sears was replaced by Wal-Mart, Amazon, Lowe's, and a host of others.  Today's mom-and-pop has to compete with Amazon; yesterday's sweated over competition from the Sears catalog.

Indeed, by definition a mom-and-pop can't successfully compete with the giants: If they could, they wouldn't be a mom-and-pop anymore, they'd be on their way to being a giant themselves.

Unless It's Actively Prevented

So, given that businesses have been around for a long, long time, how is it that there are any small businesses in existence?  Shouldn't they all have been eaten up or driven out long ago?

Sad to say, many small businesses exist purely because of government intervention.  Taxicab medallions, for example, have long been granted preferentially to individuals rather than the large citywide cab companies that once prevailed.  Car dealerships are locally owned because, a century ago, most states made it illegal for car manufacturers to also own car dealers - a restriction which Tesla is attempting to fight, with scattered success.

Standard Oil, even at its peak, was not a monopoly, but the federal government used its antitrust powers to break them up into several different oil companies, many of which still survive and compete today.  Thomas Watson famously pointed out that IBM controlled only a small percentage of the "computing equipment" industry if you included pencils and paper, but the antitrusters knocked IBM down to size and nearly put "Big Blue" out of business.

Today's business world is commanded by corporations larger and more powerful than they've ever been, largely because, for once, our government has been far too inactive.  The major banks, the major airlines, the giant Internet corporations - all are too big to fail and too big to be controlled, so they ought to be forced to break up.

This would increase competition and help create room for small businesses on the margins where the giants would have lost a bit of their grip.

Even in an era of giants, though, there are small businesses which survive due to specialization in a unique niche.  Amazon may be happy to sell you a new watch, for example, but they will never be able to provide expert repair and cleaning of your great-grandfather's heirloom antique pocketwatch or grandfather clock.  There will always be room for niche experts to make their own way.

It doesn't seem like giant corporations are able to drive local restaurants out of business either, at least not if they're any good.  Our streets may be filled with McDonald's, Olive Garden, and Outback Steakhouses, but you needn't go far to find a owner-operated restaurant.

Is there still a place, though, for a small locally-owned store that sells the exact same commodity stuff made in China as everyone else?  Perhaps there is, perhaps there isn't.  And if there is no such place, why should the government attempt to force there to be?

The Road Not Taken

If it is your dream to own and operate a general bookshop - well, I'm sorry to have to be the one to break it to you, but you need a new dream.  Those days are done - just as are the days of starting a car manufacturing business in your barn or a computer business in your garage.

Instead, look for something that isn't already being done by people who have tens of billions of dollars more than you do.  Nobody can be an expert at everything, but if you work hard enough, most everyone could be the world's leading expert at some carefully defined niche.  True, 99.99% of everyone else in the world may not care two cents for your particular niche, but the .01% of those who do will diligently seek out out.  And the Internet makes that possible in a way that never has been seen before.

That's why this ruling is so potentially devastating.  Not because it will help the local pen shop compete against Amazon - they can't, sales tax or no.  And not even because it will allow governments to raise taxes even higher than they already can, free from tax competition - they already have other ways, and other taxes, to achieve those larcenous ends.

No, the true tragedy is that your small local niche expert now cannot realistically offer his wares nationwide - because even if there are 100 people who care about what he does, and which combined would provide a livelihood, the logistical overhead of filing and remitting taxes in the 100 different local tax jurisdiction those 100 customers live in, would make business entirely impractical.

We won't be seeing more mom-and-pop stores either land-based or online.  We'll be seeing fewer, and we'll all be the poorer for it.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Business.
Reader Comments

Even with sales taxes now universally applied, Amazon and many other on-line stores will continue to get my business. I don't have to drive to several stores to try to find what I want, put up with lackluster sales support and nonexistent post-sales support, and my stuff will show up on my doorstep in 2 days. And I'm a UPS and FedEx shareholder...

July 7, 2018 8:46 PM

I’m in my 60s and recall burning up many Saturday mornings—if not longer—driving around to shop price and availability on products. I spent the first 25 years or so of my career incorporate procurement, and am amazed at the research tools I have at my fingertip. This includes product research as well as supplier research.

I might compare Delivered Cost from one internet supplier to the next, but sales tax is not part of the equation because I have no degree of certainty that the things I am buying are in stock locally, nor do I have a convenient way to shop local prices.
The other factor in internet purchasing for many people is the convenience.

After 45+ years, I left Northern Virginia in 2010 for a more rural part of the state. In my latter years up north, I did not want to fight the traffic. Here in central Virginia I don’t want to make the drive…25 miles to Charlottesville or 40 miles to Richmond. So our worlds of shopping extremes these days are a huge driving force (get it?) behind internet sales.

The HUGE issue behind collecting nationwide sales taxes can best be illustrated by the complexity of this issue in my state of Virginia:

Implementation and maintenance is going to be damned near impossible.

In Virginia, counties and locales each have their own sales taxes.
In my county, the sales taxes are:-4.3% for the state
1.0% for the county
5.3% total, EXCEPT:

>4.0% on top of the 5.3% for prepared foods (9.3% total)
>2.5% total tax on groceries
>6.5% total tax on clothing
>0.0% for OTC meds and prescription drugs

>The main town in my county tacks on 5.5% for prepared meals instead of the 4.0%.

I just looked at 3 different sales tax websites. None of them mention anything other than the top-level 4.3% and 1.0%, and they all erroneously claim that "no city or government within the county assesses additional sales taxes." They make no mention of the food, meds and clothing variances.

This rat’s nest is just one county in one state, with variances within that county. Additionally, every seller is subject to audit by every jurisdiction.

There are 95 counties and 38 independent cities in the state of Virginia alone.

And the rates and covered items can change--statewide or at the county level.

It truly is a nightmare that no one has thought through.

The other side to this is that Virginia has a Use Tax law on the books. If the seller (wherever they are) does not collect Sales Tax at the time of purchase, the end user has a legal obligation to pay it. This "User-Remitted" sales tax is called Use Tax here. But implementing THIS would not be the politically expedient thing to do.

Ps: Thanks for the Zayre reference. It brought back memories. The cast iron pan set I purchased there for $19.99 is still my daily cookware, many decades later. I eagerly look forward to sharing memories of G.E.M.

July 7, 2018 9:39 PM

I live in Arizona and we see the sales tax as the only way to get SOME offset for all the services illegals use and don't pay for. When you add up food stamps, rent subsidies, law enforcement expenses, incarceration costs , education and WIC for Anchor Babies, Medicaid, emergency room use, etc. they are quite expensive . They get paid under the table for what little work they do so no income tax. And they don't own their home so no property taxes. Sales/use taxes are the only way that they get to pay for the services they consume. Not uncommon here for towns to have very high sale tax rates and little or no property taxes. So, I am glad that the sales tax stays viable.

July 8, 2018 7:31 AM

Thanks, @BillVA, for your detailed description of government in action. Looks like the closer you get to D.C., the more complicated things get, which is not surprising. I wonder if an easy way out of this mess would be one common federal sales tax payable to the state where the goods were delivered -- less a service fee, of course. And, also of course, this tax would be deductible on your 1040 in any state with no income tax. Determination of that common rate would be an entertaining process.

July 8, 2018 9:03 AM

Hey, Micheal.

One issue I see with the Federal sales tax is that not all states HAVE a sales tax.

I gotta think that those states use it as a comparative advantage when luring residents. And they likely get their needed revenue elsewhere, so imposing a sales tax would be an additional tax requiring that relief be given elsewhere.

And look at Virginia's complicated structure. This state has decided to tax clothing and fast foods at a higher rate than groceries and meds. Regardless of what we may thing of these structures, each state should retain such local control.

That, and "more Fed" seems to be a further perversion of Enumerated Powers.

If this revenue source is going away, and spending adjustments cannot be made, then the states just need to find another source; after all, those dollars have not fled the state, they're just not being harvested.

July 8, 2018 9:24 AM

Yeah, you've hit on one of the many aspects of the "entertaining process" I alluded to. But all the sure-to-come debate will probably ignore what to me is the fundamental issue of -- how to fairly pay for essential government services. There's a cost/benefit relationship, the progressive vs regressive ability-to-pay debate, concern for the poor and otherwise unfortunates, and a ton of other oxen just waiting to be gored.

My property tax bill is going up by over 30% next year, but I don't see any improvement in government services on the horizon, I don't agree with the government on what services are "essential" in the first place, and my income is essentially fixed. There seems to be a "let's get more money and then we can figure out how to spend it" attitude in government that has to stop somewhere.

July 8, 2018 9:55 AM

I don't see how a state will be able to enforce collection of sales tax from an out-of-state retailer if that retailer doesn't have nexus/presence in its state. Possibly it could take a moral high road that sellers might follow. Issues:

1. Collecting and enforcing tax law costs money.
2. How would a state know that a taxable purchase was made by one of its citizens? It can't monitor Internet orders or US Postal Service's deliveries. It could possibly require UPS, FedEx, etc. to report all deliveries, but it wouldn't know if the contents of a particular package was a taxable purchase without inspecting its contents. Inspecting vehicles at the state line has the same issue. And both of these bring up problems of privacy and issue #1. It could require a declaration of the nature and value of the contents on the packaging exterior (not everything is taxable), but every package would then need some sort of customs inspection.
3. The state could require the sellers in other states to file a sales tax return to the state. But if the sellers don't comply, what could the state do--take every seller to court? (Issue #1 again.) It could go after the big sellers in other states, but this would require a case in Federal court--the out-of-state seller has no signed agreement that forces the case to a local jurisdiction, and there is no federal law about any of this. It would probably prevail in this case, and set a precedent so other big sellers would likely comply.
4. Many smaller sellers sell through Amazon Marketplace and Ebay. The platform could require taxes to be collected and the platform remit the taxes to the appropriate state (the seller may very well skip that step!) But for Ebay, this would have to be out the goodness of its heart or threat of a suit. Amazon has nexus in most states already and is already collecting taxes. But what about the small guys? Is a state going to sue every regional seller? And are the large sellers going to agree to do tax collection and payment while smaller sellers get off scot free?
5. States could band together to have a collective method of taxation. This will take some time, and what about the states who don't have sales tax? Are they going to enforce another state's sales tax collection? And how could a state enforce another state's laws--ship the seller in handcuffs to the other state???
6. The whole thing would be piecemeal without a Federal sales tax system, and how many Americans are going to support such a national scheme without a dire need for it? Or how many Americans would agree to Federal laws that require them to pay taxes to another state??? This may require a followup Supreme court ruling.
7. This Supreme court ruling only allows a state to try to collect taxes; it doesn't require anything. I'm sure every state that has a sales tax is now trying to figure out how to do this. It's problematic.

So, the easy way is to appeal to sellers' good graces and paint pictures of happy citizens in their states loving this new revenue that out-of-state sellers will voluntarily shower on them. The hard way is the grind of court or Federal legislation.

I see this thing becoming a nightmare for sellers and buyers--you and I. Nothing may happen for a long time.

July 9, 2018 1:09 AM

Very simply, without all of the noise in the details of taxation, the internet sales tax is unconstitutional. And it should scare the heck out of anyone who believes that the SCOTUS can read and interpret English. The Constitutions states that no tax or levy shall be laid upon items exported from any state. If someone would like to amend the Constitution to state otherwise, then that is one thing. But to rule that those simple words can simply be ignored because times have changed, is a terrifying thing. Kennedy should be ashamed of himself. I expect the Commie wing of the SCOTUS to rule in the favor of the collectivist government. It will be interesting to see if anyone asks Kavanaugh what he thinks. Not bloody likely though.

July 28, 2018 12:24 AM
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