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Analysis: Cruz, Business Joust Over Online Taxes

Congress has proposed a national standard for sales taxes on the internet, an idea backed by trade groups for so-called brick-and-mortar retailers. But U.S. Sen. Ted Cruz, R-Texas, is a loud opponent of the legislation.

U.S. Sen Ted Cruz decries Washington efforts to regulate the Internet as a utility in a speech to Capital Factory on Nov. 14, 2014.

Who knew a conservative politician could get criticized by business for opposing a tax bill?

U.S. Sen. Ted Cruz, a Texan on the early list of potential 2016 Republican presidential candidates, is talking about sales taxes on the internet, which seems safe enough.

Two taxes are in his sights, and one is almost completely without controversy, especially for a limited-government conservative like Cruz. The senator does not think the bills you pay for access to the internet should be taxable. Most of the support for taxing internet access comes from governments hoping to benefit. According to the Center on Budget and Policy Priorities, that tax brought in $358 million last year for state and local governments in Texas.

Cruz’s opposition to sales taxes on goods and services sold online, however, has raised the eyebrows of everyone from government budget writers to retailers that compete with internet and catalog sales.

“The last thing we should be doing is passing a massive new internet sales tax,” Cruz said at a recent news conference in Washington. He is opposed to federal legislation that would require online retailers to collect sales tax for the states where those customers reside — just like retailers in those states have to do. The legislation would treat online retailers as if they were located in the states where they are making their sales, whether they have a physical presence or not.

It is easy enough for someone from the federal government, which does not rely on sales taxes, to oppose those levies, whatever means of commerce they come from. But sales taxes are the biggest source of revenue for the state government in Texas and an important source for local governments around the state. Texas would have collected an additional $1.78 billion in 2012 had all online and catalog sales been taxed, according to the National Conference of Legislatures. Nationwide, the states missed $23.3 billion, by the organization’s estimate.

Local governments have property taxes to supplement other kinds of revenue. The state has other sources, but nothing on the order of the sales tax. Texas has no state income tax and only a few people in public life willing to even consider one. Property taxes pull in money for local governments and school systems, but are constitutionally prohibited at the state level.

Only one of the three classical legs of the tax stool — income, wealth and consumption — is used by the state, and Cruz is whittling on that one.

Consumption has changed. You probably heard the news that retail sales on the day after Thanksgiving — Black Friday, as it is known — were down and that online sales were up on “Cyber Monday,” a few days later.

The suggestion from Cruz is that those Monday sales, or a significant portion of them, should not be subject to sales taxes.

Some brick-and-mortar retailers, people who own stores where customers shop in the traditional way, are not happy. Their argument, broadcast by a trade group called Stand With Main Street, is simple: It costs 8.25 percent more to buy something in their Texas stores, where sales taxes are collected, than it costs to buy the same item online, where sales taxes are often not collected. They recently directed an attack at Cruz on BuzzFeed as part of a more general campaign to get the sales tax bill through Congress.

The businesses have been lobbying for years — first against mail-order companies and now against internet retailers — to force everyone to play by the same rules.

Cruz flips the argument, saying the small mom-and-pop retailers are falling victim to big retailers on and off the internet. His reasoning is that only the big guys have the administrative ability to manage tax liabilities and audits and bureaucracies in every state where they sell things and that the little ones will get crushed.

Lots of online sellers already collect Texas sales taxes from their customers. If they have physical properties here, the state has been aggressive in pulling them in. Amazon, which went for a long time without collecting the taxes, now does.

Cruz is not the only politician opposed to the federal bill; his Senate colleague from Texas, John Cornyn, is also opposed.

But he is making the most noise about it, and on a national stage. And it is hard, especially for conservative politicians, to argue in favor of more sales taxes.

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