There’s a movement afoot in Congress to advance legislation that would eviscerate the Commerce Clause of the Constitution, empower a state-based tax cartel, and potentially decimate the Internet economy in the process. Business Week has the details:
In the next week, legislators are expected to introduce bills in the House and Senate promising to do away with the “physical presence” requirement. If a bill passes — and that’s a big “if” — it would require all online retailers, except for the tiniest companies, to collect sales taxes in the 23 states that are part of the Streamlined Sales Tax Project. The states would compensate the retailers for the trouble, while promising not to sue them for tax collection mistakes that are made.
The Streamlined Sales Tax Project, or “SSTP”, sounds good in theory but would be disastrous in practice. Michael Graham of the Boston Herald penned an editorial about the SSTP today and he does a nice job pointing out why, when it comes to “tax simplification,” the devil is always in the details and those details are typically anything but “simple” (or taxpayer-friendly for that matter).
The real danger of the SSTP, however, is what it means for the Constitution and tax competition among the states. In this 2003 paper I penned with Veronique de Rugy for the Cato Institute, we showed why the SSTP would not only fail to simplify the sales tax code, but would actually cede dangerous taxing powers to state and local governments over the interstate marketplace. In the process, Veronique and I argued, a multi-state sales tax cartel would be spawned: Continue reading →
For those of you who have followed the ongoing saga of Internet taxation, you’re familiar with a hideous little creation known as the Streamlined Sales Tax Project or “SSTP.” As I detailed in this briefing paper last year, the SSTP is basically a giant sales tax cartel scheme. In the name of “tax fairness” and a supposed “level playing field,” some state and local officials would allow the extraterritorial taxation of interstate commerce via this Frankenstein monster of a tax collection scheme. Tax competition among the states would suffer as a result and consumers would be burdened with billions in new tax obligations. All this to get at the tiny amount of e-commerce out there, which still isn’t more than 2 percent of all retail sales in America!
The folks over at Progress & Freedom Foundation have just released a new report documenting just how costly this SSTP scheme would be. Take a look at their findings here.
Let’s hope Congress doesn’t give in to state and local pressures to erase the protections our Constitution provides for interstate commerce and vendors.
Consumers are buying more and more stuff from online retailers located out-of-state, and state and local governments aren’t happy about it. States argue that this trend has shrunk their brick and mortar sales tax base, causing them to lose out on tax revenues. (While consumers in most states are required by law to annually remit sales taxes for goods and services purchased out of state, few comply with this practically unenforceable rule).
CNET’s Declan McCullagh recently reported that a couple of U.S. Senators are pushing for a bill that would require many Internet retailers to collect sales taxes on behalf of states in which they have no “nexus” (physical presence).
In his latest Forbes.com column, “The Internet Tax Man Cometh,” Adam Thierer argues against this proposed legislation. He points out that while cutting spending should be the top priority of state governments, the dwindling brick and mortar tax base presents a legitimate public policy concern. However, Thierer suggests an alternative to “deputizing” Internet retailers as interstate sales tax collectors:
The best fix might be for states to clarify tax sourcing rules and implement an “origin-based” tax system. Traditional sales taxes are already imposed at the point of sale, or origin. If you buy a book in a Seattle bookstore, the local sales tax rate applies, regardless of where you “consume” it. Why not tax Net sales the same way? Under an origin-based sourcing rule, all sales would be sourced to the principal place of business for the seller and taxed accordingly.
Origin-based taxation is a superb idea, as my CEI colleague Jessica Melugin explained earlier this month in the San Jose Mercury News in an op-ed critiquing California’s proposed affiliate nexus tax:
An origin-based tax regime, based on the vendor’s principal place of business instead of the buyer’s location, will address the problems of the current system and avoid the drawbacks of California’s plan. This keeps politicians accountable to those they tax. Low-tax states will likely enjoy job creation as businesses locate there. An origin-based regime will free all retailers from the accounting burden of reporting to multiple jurisdictions. Buyers will vote with their wallets, “choosing” the tax rate when making decisions about where to shop online and will benefit from downward pressure on sales taxes. Finally, brick-and-mortar retailers would have the “even playing field” they seek.
Congress should exercise its authority over interstate commerce and produce legislation to fundamentally reform sales taxes to an origin-based regime. In the meantime, California legislators should resist the temptation to tax those beyond their borders. Might we suggest an awards show tax?
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I hate to disagree with my friend Larry Magid, a technology analyst for CBS News, who writes this week in favor of a uniform online sales tax regime. Magid says he “can’t think of any good reason why customers of online retailers should shop tax-free while people who spend their money locally have to pay sales tax.” Well, I’ve got a couple of good reasons, Larry.
Back in 2003, Veronique de Rugy [now of the Mercatus Center] and I penned a lengthy Cato Institute white paper on this issue entitled, “The Internet Tax Solution: Tax Competition, Not Tax Collusion.” In that study, we addressed the arguments in favor of the so-called Streamlined Sales Tax Project (SSTP) and noted that a move toward more simplified tax regimes was certain laudable. In reality, however, the effort by states to build a “uniform” sales tax regime for online sales was less about achieving simplicity and more about raising taxes and imposing tax collection burdens on interstate commerce. Veronique and I pointed out that this created both economic and constitutional concerns since the SSTP was tantamount to a state-run sales tax cartel:
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My friend Steve DelBianco of ACT and NetChoice recently reminded me that the effort by state officials to impose a burdensome crazy-quilt of sales taxes on the Internet continues. Proponents call this effort the “Streamlined Sales Tax Project” (SSTP) by what it really is–as Veronique de Rugy and I argued in this 2003 Cato Institute report–is a giant sales tax cartel. The states basically want Congress or the courts to give them authority to impose parochial tax collection burdens on what it clearly national–sometimes global–commercial activity. And they want to administer it all together as one big cartel. (And you thought the Articles of Confederation were dead!)
Luckily, Congress and the courts haven’t caved to these demands and given state governments the right to ride roughshod over the Constitution and the Commerce Clause. But, in reality, the only thing that’s held back state and local efforts to impose such sales tax collection burdens on Internet vendors so far is an old 1992 Supreme Court decision, Quill Corp. v. North Dakota and a handful of other legal precedents. Those cases made it clear that it would be unfair to impose tax collection burdens on out-of-state vendors. Instead, state and local governments could only require tax collection if the entity they sought to tax had a “nexus,” or tangible physical presence, in their jurisdictions.
Seems fair enough, right? Basically the court was just restating the old “No taxation without representation” motto upon which our country was founded. Well, apparently a lot of state and local officials aren’t comfortable with that notion because they have spent years trying to evade that sensible constitutional admonition. And in recent years they have been trying to get Congress to agree to toss Quill and those other decisions (and the Commerce Clause) out the window so that they can adopt the SSTP and start taxing every Internet transaction is sight.
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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.
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