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Wednesday, April 11, 2007

Internet Sales Tax Wars Continue
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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.

Although I used to be quite active on this front, in recent years I haven't been paying nearly as much attention to this important issue as I should. And I fear many other defenders of Internet freedom have fallen asleep at the wheel as well and are ignoring this persistent threat. Luckily, Steve is still on top of it and reminds us in this recent essay that the pro-tax crowd is still working hard to get Congress to overturn Quill. As Steve notes:

State and local officials, always hungry for new sources of revenue and imagining a huge pot of gold at the end of the Internet rainbow, are now trying to get around that Supreme Court ruling by creating the SSTP in an effort to standardize and simplify their sales tax systems.

But simplifying local sales taxes is turning out to be anything but a simple process. So far, only 15 states have implemented the changes. The rest are figuring out that "simplifying" their sales taxes can’t possibly generate enough new revenue to justify the complicated changes and increased cost of collection required by the SSTP.

Seeing what’s been going on around the country, SSTP proponents are getting anxious. They want Congress to step in and require that sellers everywhere (even those in states that don’t even have a sales tax) start collecting sales tax for any state that meets the SSTP standards. But, in addition to being complicated for the states to implement, the "simplified" SSTP system will be enormously burdensome and expensive for online retailers, especially small businesses trying to reach larger markets through e-commerce.

This is important stuff. It goes without saying that granting state and local government the right to tax companies, transactions and activities outside their jurisdictions would be bad enough. But think of what a horrible precedent this would establish for the future. If states can tax interstate Net commerce, what's to stop them from regulating it too?

posted by Adam Thierer @ 2:16 PM | Taxes

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Adam -- Glad to have you re-engage in the SSTP debate, although I don't think it's right to assume that the Quill decision is acting as a brake on the trainwreck that is SSTP.  (Gosh how I wish it were true)

You suggest that “taxation without representation” was a factor in Quill, but the ruling held that North Dakota broke no "due process" rules in attempting to regulate a retailer (Quill) who choose to ship products into North Dakota.  It's going to take more than that to stop a tax collector. 

The good news is that Quill also held that that the present patchwork system of 7,500 taxing jurisdictions with contradictory rules and multiple filing requirements constituted an unreasonable burden on interstate commerce.  That's the only reason North Dakota wasn't allowed to force Quill to collect & remit sales tax on shipments to residents of the state.

Quill essentially left the states with two options:1. Simplify their sales tax systems and come back to the Court to show it’s no longer an unreasonable burden on interstate commerce; or

2. Since Congress has the power to regulate interstate commerce, ask them to force sellers to collect remote sales taxes (whether they're simple or not!)A handful of states are pursuing option 2, and they’re making dangerous progress.  Particularly when you give them a Democratic majority.  And you have to worry that SSTP proponents will try using the internet access tax moratorium bill as a locomotive to pull their train through Congress this year.

I’m reluctant to disagree with an ally, but I think we all need to wake up to the real threat that SSTP could impose new burdens on e-commerce retailers.  I can hear that train a-coming...

Posted by: Steve DelBianco at April 11, 2007 3:57 PM

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