Is it "unfair" for sales over the Internet not to be taxed while other sales are taxed?

No. In fact, it would be blatantly unfair to tax out-of-state vendors that do business in a state over the Internet. Taxes pay for services, such as police and fire protection, roads, and parks. As Adam Thierer of The Heritage Foundation has pointed out, ". . . out-of-state vendors of electronic commerce, though subjected to the same tax burdens that Main Street vendors must bear, would receive none of the benefits for the taxes they paid to state and local governments where they did not reside. This amounts to a form of taxation without representation."⁷

One reason many people assume Internet sales should be taxed is because without realizing it, they have absorbed the mentality of those who believe in taxation of almost anything as a matter of principle. Instead, taxation is actually a practical matter involving the limited powers the American people grant to government.

There is no underlying assumption in the American system that says everything should be taxed just because it's "out there." Under the American system, the people grant to government the limited powers that it wields, including taxation. Those powers are limited by the federal and state constitutions, and as long as the people do not expand the government's power to tax, the fact that a new sort of commerce comes along creates no moral, legal, or economic sanction for expanding that power to the new commerce.

Besides, as Aaron Lukas writes,

. . . it's not fair to force out-of-state firms to act as tax collectors when they don't benefit from state services. When a [Michigan] business collects sales taxes, there is a clear linkage between the taxes paid, the services provided, and legislative representation. After all, local firms benefit from police and fire protection, roads and waste collection and other state services, so it is proper that they help cover those costs. And local firms can make their voice heard directly through lobbying and membership in groups like the Chamber of Commerce.

Remote sellers, on the other hand, don't enjoy any of those advantages. If the state wants more of the taxpayers' money, it should collect it itself and not try to push the burden onto out-of-state businesses.

Finally, differentiated tax rates create healthy competition that helps keep local rates under control. For example, some residents of Manhattan drive to Delaware to avoid sales taxes—an option that has undoubtedly curbed the profligate fiscal habits of New York politicians. Electronic commerce similarly guards against excessive taxation. When sales tax rates get too high, it's important that [Michiganians] have a shopping alternative.⁸

Heritage's Thierer notes that the "fairness" argument simply misses the point entirely:

. . . state and local businesses pay sales (and other) taxes because they can take advantage of the government programs or public services provided with those funds, such as roads, schools, parks, and police and fire protection. Remote vendors engaging in interstate electronic transactions do not benefit in a similar way either from these taxes or from the programs or services these taxes fund. Moreover, Internet vendors are tangible "bricks and mortar" businesses that will continue to pay routine corporate income and property taxes where they reside. Even a permanent Internet tax moratorium would not prevent states and localities from imposing equal sales tax rates on companies within their own jurisdictions.⁹

John R. LaPlante, managing editor of the Heartland Institute's Intellectual Ammunition , cites scholars at the University of Texas who estimate that "in 1998 alone, the Internet was responsible for over 1.2 million jobs—representing more income for workers, and for governments, more taxes. By contrast, University of Chicago and Harvard researchers estimate that less than 2 percent of sales tax revenues will be 'lost' to unreported Internet transactions."¹⁰

The National Governors' Association is fond of citing a poll which found that 72 percent of Americans believe it is unfair that local businesses must collect sales taxes while online sellers do not. But the very same poll also shows that 85 percent of Americans do not approve of a tax to make up for any shortage in revenues due to the rise of untaxed e-commerce.¹¹

Finally, governors and mayors who argue for taxing Internet purchases for reasons of "fairness and equity" cannot have their cake and eat it, too. Every state's sales tax system is already riddled with exemptions and exceptions that treat different goods and services "unfairly." Most states do not apply sales tax to food or clothing. Many exempt services. Some exempt agricultural equipment, and so on.