The Internet tax issue is not as hot and sexy as it was a few years back, but we can still give it a big KISS (Keep it Simple Stupid). Yesterday’s hearing of the Senate Finance Committee shows that there is still some thunderous passion over taxing the ‘Net. The hearing–consisting of two full panels of witnesses, one devoted to sales tax and another toward the business activity tax–featured state tax collectors and offline companies versus online companies and direct marketers. The legislative thrust of the one panel related to sales taxes is S. 2152, a bill introduced by Senator Michael Enzi.
The hearing revealed that the Streamlined Sales Tax Project (the SSTP, an attempt to make sales taxes more easily collectable by out-of-state sellers), just isn’t simple enough. In particular, I’ll direct TLF readers to the informative (and anti-SSTP) testimony of George Isaacson, tax counsel for the Direct Marketing Association.
The uninitiated can easily be caught up by all the different arguments advanced by proponents for the SSTP. Supporters say that a system that allows remote sellers to evade collecting sales tax from consumers hurts state tax revenues and is unfair to offline “Main Street” retailers that may have higher prices because they do have to collect the tax. But fortunately, while this high-tech debate may be fashioned by the seemingly borderless jurisdiction of digital networks, the old fashioned U.S. Constitution has something to say about this form of interstate commerce. A little background is required though.
According to the Quill decision, the commerce clause requires that there be a sufficient connection between the taxing authority and the person burdened by the tax (a “substantial nexus” in the words of the Supreme Court). This constitutional requirement has in practice meant that, for commerce clause purposes, a nexus requires that a seller have a physical presence in a state before it can be obligated to collect a sales tax for that state. I intentionally mean to differentiate the commerce clause from the Constitution’s due process clause, which also requires a nexus between a state before it can exert authority over a person. In Quill, the court, albeit somewhat confusingly, said that for where due process is concerned, a nexus means minimum contacts but does not require a physical presence.
So essentially a physical presence is just a proxy for establishing when a sales tax collection requirement does not unduly burden interstate commerce. By making the nature and rate for various sales taxes of participating states more coherent, the SSTP is meant to change that proxy. It seeks to persuade Congress to allow states to force remote sellers to collect and remit sales taxes based on a simplification of the sales tax code that reduces the burden on interstate commerce. The legislative answer to the SSTP is S. 2152.
Yet Congress should insist on greater simplification. The SSTP’s simplification aim is warranted, but until states adopt a “one rate per state” and establish uniform definitions for taxable and exempt products, include a small business exemption, and don’t force companies in non-participating states to collect and remit sales taxes to participating states, Congress should kiss S.2152 goodbye.