Yesterday, the Supreme Court dropped a decision in Wayfair v. South Dakota, a case on the issue of online sales tax. As always, the holding is key: “Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U. S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753, are overruled.” What follows below is a roundup of reactions and comments to the decision.

Joseph Bishop-Henchman at the Tax Foundation thinks this decision sets up a new political fight in Congress and in the states:

All eyes will now turn to Congress and the states. Congress has been stymied between alternate versions of federal solutions: the Remote Transactions Parity Act (RTPA) or Marketplace Fairness Act (MFA), which lets states collect if they agree to simplify their sales taxes, and a proposal from retiring Rep. Bob Goodlatte (R-VA) that would make the sales tax a business obligation rather than a consumer obligation, and have it collected based on the tax rate where the company is located but send the revenue to the jurisdiction where the customer is located. RTPA and MFA are more workable and more likely to pass, but Goodlatte controls what makes it to the House floor, so nothing has happened. Maybe today’s decision will change that.

Berin Szoka at TechFreedom noted:

For the last twenty-six years, the Internet has flourished because of the legal certainty created by Quill. Now, no retailer can know whether it must collect taxes, and smaller retailers face huge challenges. As Chief Justice Roberts notes, the majority ‘breezily disregards the costs that its decision will impose on retailers.’ The majority insists that software will fix the problem of calculating the correct state and local sales tax for every transaction, but with over 10,000 jurisdictions taxing similar products differently, the problem is nightmarishly complicated.

My colleague Doug Holtz-Eakin explains the tension:

What is the economic upshot of this decision? Certainly, it puts in-state and brick-and-mortar retailers on a level playing field with online sellers. In isolation, that is an improvement in the efficiency of the economy because people will shop based on the product and experience and not the tax consequences. Recall, however, that in many states a resident is liable for the “use tax” on her out-of-state purchases. If the sales tax is now being collected, it will be important for states either to drop the use tax or to make sure that there is no double taxation in some other way. If not, then the result of this decision will be less efficiency.

Another aspect of the decision is the impact on federalism and the notion of representation. The decision means that South Dakota can now dictate some of the business operations of firms that have no representation in the South Dakota legislature. Is that fair? Moreover, firms can no longer shop among states to find the sales tax regime that they like best — they will be subject to the same sales taxes across the country regardless of where they operate.

Grover Norquist at American for Tax Reform had this to say:

Today the Supreme Court said ‘yes—you can be taxed by politicians you do not elect and who act knowing you are powerless to object.’ This power can now be used to export sales taxes, personal and corporate income taxes, and opens the door for the European Union to export its tax burden onto American businesses—as they have been demanding…

We fought the American Revolution in large part to oppose the very idea of taxation without representation. Today, the Supreme Court announced, ‘oops’ governments can now tax those outside their borders—those who have no political power, no vote, no voice.

Adam Michel of the Heritage Foundation also focused on federalism at The Daily Signal:

The new status quo under Wayfair is untenable, creating a Wild West for state sales taxes. Some will point to seemingly easy solutions that have been promoted for decades. One example is the Remote Transactions Parity Act, sponsored by Rep. Kristi Noem, R-S.D.

Noem’s bill would maintain the new expanded power of state tax collectors, while imposing nominal limits and simplifications on states’ tax rules.

Such proposals that force sellers to track their sales to the consumer’s destination and comply with laws in other jurisdictions are fundamentally at odds with the principles of local government and American federalism.

Rob Port is concerned about the interstate commerce implications:

The purpose of the interstate commerce clause is to prevent the nightmare of fifty states squabbling with one another over trade wars between their constituent industries, or trying to exert political influence on one another. Congress, and not the states, is to regulate interstate commerce.

I feel like the Supreme Court, by overturning Quill and giving the states new powers to tax beyond their borders, has weakened interstate commerce protections and cracked open the lid to a real can of worms.

All Things SCOTUS has a list of reactions from conservatives.

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?

Origin-based sourcing is not without its detractors, but the arguments against it are weak. R. David L. Campbell, for instance, responds to Thierer’s Forbes.com column by claiming that origin-based taxation amounts to “taxation without representation,” because it would result in some consumers paying sales taxes despite having no say over the elected officials who established such taxes.

That’s true, but so what? Consumers who buy from retailers located out-of-state are already impacted by laws in those states all the time. For instance, DC residents cannot buy wine and have it shipped to them from any Pennsylvania-based retailer due to that state’s laws, even though the District of Columbia has fairly permissive laws regarding direct-to-consumer wine shipments from out-of-state.

Cconsumers who buy online also pay all sorts of indirect taxes. Consider that major electronics retailer Newegg.com, which is incorporated in California, paid $22m in state corporate income taxes in 2008. A big chunk of that $22m was passed on to out-of-state consumers who have no say over California tax rates. While most Newegg.com customers can’t vote in California, many of the firm’s thousands of employees can. The company is also better positioned than thousands of dispersed citizens to lobby state legislators for a favorable business climate.

Campbell also brings up the SSTP (Streamlined Sales Tax Project), an effort launched back in 2000 by a group states to establish a cooperative sales tax regime. While the project’s objective to “streamline” sales taxes is laudable in theory, it turns out — unsurprisingly — that getting dozens of state governments to get behind a simple, uniform, reciprocal sales tax regime is quite challenging in practice.

Joseph Henchman, the Tax Foundation’s Vice President of Legal & State Projects, discussed the project’s massive shortcomings in his 2009 testimony before the Maryland Legislature [emphasis in original]:

The SSTP already abandoned the notion of taxing like transactions alike when they adopted “destination sourcing” for online sales, but permitted states to adopt “origin sourcing” for intrastate sales. This in effect requires Internet companies to collect sales taxes based on where their customer is located, but allows brick-and-mortar stores to collect sales taxes based on where the store is located. In this way, the SSTP prevents a level playing field between Internet business and brick-and-mortar businesses.

Coupled with the SSTP’s non-worry about reducing the number of jurisdictions . . . full implementation of the SSTP at this time, without serious reforms, could result in a serious and inequitable burden on e-commerce. . . . The SSTP has not accomplished its mission. The SSTP should look again at serious simplification efforts before declaring themselves a success and seeking to expand state taxing power. . . . Neither the wholesale adoption nationwide of uniform sales tax statutes, nor the development of a working alternative that provides the certainty needed for long-term investment, are likely in the foreseeable future.

While the SSTP has made some progress in the last couple of years, it continues to encounter resistance from state governments, and sales taxes remain exceedingly complex.

Congress could address the issue in a far simpler manner by enacting legislation that provides for origin-based taxation. Dr. Michael S. Greve, the John G. Searle Scholar at the American Enterprise Institute (and the Chairman of the Competitive Enterprise Institute) wrote a superb study in 2003, Sell Globally, Tax Locally, in which he articulates the case for origin-based taxation in painstaking detail. Greve discusses the importance of tax competition and dismisses the “race to the bottom” argument on pages 26 to 28:

By rendering sellers indifferent to the local tax, destination-based taxation minimizes tax competition. Under an origin-based regime, in contrast, sellers in a low-tax jurisdiction enjoy a competitive advantage. States and countries will seek to attract firms by offering a low tax rate. As jurisdictions attempt to stem the flight of business firms into lowtax jurisdictions, sales taxes will spiral downward. If sellers are perfectly mobile and transaction costs (such as shipping cost) are negligible, the equilibrium tax rate—all else equal—is zero. This “race to the bottom” argument is the sum and substance of the case for destination-based taxation and the true reason why governments consistently and vociferously oppose origin-based taxation. But the argument is unpersuasive.

First of all, all else is not in fact equal. We would probably see the zero-tax equilibrium if sellers were entirely free to designate their home state, or to designate their place of incorporation as their home state. The principal-place-of-business rule, in contrast, disciplines the sellers’ choices. As already suggested, sales taxes are one element in a bundle of services and obligations that are offered by each jurisdiction. A jurisdiction that provides an educated labor force, an excellent infrastructure, a favorable regulatory environment, a sensible and efficient judicial system, or sufficient “quality of life” benefits may be able to exact a sales tax or its economic equivalent. . . . An unattractive jurisdiction that drives up the cost of doing business, meanwhile, will be unable to compensate those selfinflicted disadvantages by becoming a “sales tax haven.”

More fundamentally, one cannot assume that the downward pressure on tax competition necessarily translates into a race to the bottom. Under certain (heroic) assumptions, tax competition may compromise local governments’ ability to finance public goods; in that event, the race is to the bottom. But . . . it is equally plausible . . . to welcome tax competition as a much-needed discipline and countervailing force to local rent-seeking and interest group exploitation. Under these more realistic assumptions, tax competition reduces the “political residuum” that is available to local politicians for purposes of redistribution—without, at the same time, compromising local governments’ abilities to levy taxes, akin to user fees, to finance public goods.

It is true that destination-based systems also curtail some tax competition. The local tax mix, including the sales tax, will be a factor in the citizens’ (though not firms’) locational decisions. . . . In many cases, though, firms may be more responsive to changes in the local tax structure—and to advantageous changes in “foreign” jurisdictions—than are individual citizens. A 2-percent local sales tax hike may not induce an individual to move. . . . That same increase, though, may have a rather dramatic effect on firms’ locational decisions.

States compete for citizens and firms on any number of margins—environmental regulation, labor regulation, business and income taxes. All elements of the regulatory and tax environment operate as factors for local firms. Countless government decisions provide firms with competitive advantages or disadvantages and, at the margin, shape business decisions to locate in a given state or locality.

Amen.

Welcome to the jungle We take it day by day If you want it you’re gonna bleed But it’s the price you pay

Amazon.com announced yesterday that it won’t be paying the price of affiliate advertising in North Carolina if the state uses it to assert nexus for sales tax collection. It will stop using affiliates in the Tar Heel state, which is what Overstock did when New York considered the affiliate nexus approach.

States are wrong-headed when it comes to asserting tax nexus just because some companies use a web-based network of affiliates to help advertise their products. As I’ve discussed before, affiliates are more akin to in-state advertisers, not sales reps.

Furthermore, states that pass these affiliate nexus bills really end up hurting in-state companies that rely on Internet advertising.  At a time when companies are struggling for ways to make money on the Internet, we think now is a particularly bad time to tax Internet marketing.

North Carolina should stay out of the affiliate tax jungle. It’s constitutionally messy, bad policy…and as Guns ‘N Roses mildly stated, it’ gonna bring you down – huh!

There’s a hearing going on as I write on a Louisiana bill (HB 569) that would create a new tax on the Internet bills of consumers, despite the fact that there’s a federal moratorium prohibiting it.

We just heard Attorney General James D. “Buddy” Caldwell say that this isn’t a “tax”, it’s a “fee.”  Louisiana is taking an interesting approach – HB 569 would impose a tax of 15 cents per month on ISP subscribers that would go to preventing and prosecuting Internet-based crimes against children.  AG Caldwell claims that it is merely a “usage fee”  — the price we pay for using the Internet.

But the Internet Tax Freedom Act explicitly sought to prevent the imposition of a tax that simply used different terminology. The Act defines a tax as:

(i) any charge imposed by any governmental entity for the purpose of generating revenues for governmental purposes, and is not a fee imposed for a specific privilege, service, or benefit conferred; or (ii) the imposition on a seller of an obligation to collect and to remit to a governmental entity any sales or use tax imposed on a buyer by a governmental entity.

Under this definition, a charge on Internet access is not like a fee imposed for recording a mortgage, for example. When you pay a recording fee, you pay for the costs you impose on the government for handling your transaction. If you were to pay a “usage fee” for law enforcement to deal with online safety, you’re paying for general services, something that law enforcement/government should be doing anyway to protect the public.States are cash-strapped right now. Louisiana is pursuing a worthy goal of trying to provide more resources for law enforcement for Internet safety. Taxing the Internet is just the wrong way to do it.

If Louisiana’s  law enforcement/criminal justice system needs more resources to pursue and control criminals, the state shouldn’t hesitate to re-allocate its revenue or even raise the taxes that already fund those efforts.  It’s absurd to tax ONLY Internet users when child predators do nearly all their evil in the physical world of school playgrounds and hotel rooms. Under the logic of the bill’s proponents, we should also be adding to the hotel tax, or to the cell phone tax since conversations occur on cell phones.

UPDATE:  The bill was deferred by committee vote. This usually means that the bill is dead for the session.