CSCI-4966
Computer Ethics
Term Paper
Adam Grimm
With the exponential growth of the internet and e-business, taxation of online sales has become an increasingly contentious issue.States and some small businesses have been clamoring for a method of taxing online retailers, while large businesses and the federal government have been attempting to keep the internet a tax-free zone.All across the internet, in all types of online communities, this subject has come up as a topic of conversation.
In this paper, I would like to discuss the ethical aspects behind taxing online sales.My position is that taxation of internet sales is appropriate and ethical based on the "nexus" concept.A nexus is "a physical store, warehouse, or sales facility."[1]This concept is based on a Supreme Court decision[2] and expresses the difference between a purely online sale, and one that is conducted with both online and physical components.
The basis for my two-part argument is the utilitarian school of ethical thought.In order for an action to be ethical, it must bring the most benefit to mankind.[3]This benefit is based on intrinsic value to human beings, which includes concepts such as happiness, pleasure, and ideals.Within the scope of this discussion on internet taxation, I will focus on happiness and ideals, which require some modicum of personal success and a perception of fairness and equity for all people.
It is important, too, to understand who the parties that will be affected by internet taxation are.For the purposes of this argument, I will divide all people into five groups.The first group consists of state governments, those that directly levy sales taxes under the current tax structure.The second group consists of federal government entities, which have been given the authority, under the Constitution, to regulate interstate commerce.The third group consists of those locally based businesses that have little or no internet presence, and conduct the bulk of their business in a "bricks and mortar" establishment.The fourth group consists of those businesses that conduct a large portion of their sales over the internet.This group includes both businesses with established physical stores and those that conduct their business exclusively over the internet.The fifth group consists of the consumers, those people who purchase goods over the internet and in person.
The first part of my argument is that taxation on online sales of companies without a nexus in the consumer's state is unethical.This kind of company would conduct their business by making transactions over their website and using a shipping company to ship the goods to the consumer.These goods are shipped from an out-of-state warehouse.These types of transactions can be considered analogous to catalog sales made over the telephone or by mail order.[4]
The balance now must be weighed, as to who will benefit and who will be hurt by a sales tax on this type of commerce.State governments would obviously benefit from a sales tax on these companies.The increased revenue could be used for any number of state-funded programs.The federal government would see no benefit either way, since sales taxes are purely a state income.
Local businesses definitely stand to profit from a sales tax on these out-of-state companies who sell over the internet.Any increase to the consumer in the costs of these goods would decrease the competitiveness of the online businesses.This, then, would help the small, bricks and mortar, businesses in their struggle to stay profitable.
The losers in this tax scheme are the consumers[5] and the online businesses whose sales would be taxed.Any increase of cost and decrease of competitiveness is against the interests of those people who wish to purchase goods.By the same token, the decrease in competitiveness of the online businesses would make it harder for them to sell their goods and make a profit.
The tally here stands at two groups gaining and two groups losing.However, there is another element that must be considered.For the consumers, there are two places that they will lose out with this taxation.Not only will they derive less happiness because of increased expense, but they also will lose the ideal of what taxes mean, and why those taxes exist.
Taxes exist, primarily, to support government and the infrastructure that people expect out of the government.People who are generally expected to pay taxes are those who use the resources of the government and who are obligated to help their fellow state residents by funding state programs.Companies located out of state don't use the roads or services within the state where the goods are shipped (the users here are the shipping companies, who do pay registration fees and taxes to support those roads).Thus, they shouldn't be obligated to pay taxes to support those services.[6]
By this reasoning, then, consumers and taxpayers lose the ideal of the purpose of taxes if these online sales are taxed.When this new loss is added to the equation, losses outweigh gains by three to two.Therefore, this type of tax is quantitatively unethical.
The second argument is that those businesses that do have a nexus within the state should have their online sales in that state taxed.Companies that do business in this way sell goods both through their website and through their physical storefront.Usually, these portions of the business are interchangeable, in the sense that goods purchased online can be returned or exchanged at the store.
The argument for this taxation runs along similar lines to the previous argument.State governments and smaller, local businesses win from increased state revenues and decreased competitiveness of the larger online retailers.The internet retailer and the consumer lose from higher effective prices and a reduction in competitiveness in the market.
Again, the deciding vote is the ideal of the consumer.In this case, that ideal is fairness and a right to an equitable tax structure for businesses.Quite simply, it is not equitable to require one business to charge sales tax, while the business next door doesn't have to, on the same item, merely because the transaction was completed on a computer.This type of structure gives an unfair advantage to multistate corporations that can afford large e-commerce sites.
Therefore, with the ideal of the consumer being weighed, taxing those companies with a nexus within the state is ethical.In fact, this argument reaches as far as to say that it would be unethical to not tax these businesses.
The ethics of internet taxation, then, come down to whether or not the business in question chooses to operate a nexus, or physical "bricks and mortar" location, within the state where the consumer is located.Companies that run these physical locations should pay tax the same as any other company with a storefront, regardless of whether the transaction takes place over a computer or inside the store.