Friday, March 19, 2010 - The Progress & Freedom Foundation Blog

States - Leave No Taxable Opportunity Behind

The recession has been many things to many people. For most of us, these are trying times, to say the least. But like a newscaster or mortician who profits from some of life's worst experiences, the states see the recession somewhat more optimistically than the rest of us.

Sure, in the next fiscal year states face nearly $180 billion in budget deficits, with many in dire straits (as this somewhat hyperbolic article touches upon). Yet, letting no crisis go to waste, this has honed where many of those cash-strapped states are looking for their next meal.

The Wall Street Journal recently noted that the slump has brought back to life an idea that many of us thought had died - requiring e-retailers to collect sales tax from out-of-state customers. The state's new tool of choice? The so-called " tax."

It works like this.

Remote / online merchants that have "local marketing affiliates" (i.e., entities essentially operating website pointers to remote merchants) in a given state, must collect state sales taxes for customer purchases of their products - all because the "local affiliate" in that given state pointed any sale (not even the specific sale) to the out-of-state retailer. This controversial tool (now being contemplated by 6 states, and in effect in 3 others) allows states to get around constitutional requirements of physical presence in a state to collect sales taxes. It also gets around the inconvenient fact that in most states with sales taxes, customers largely ignore their obligations to pay that tax (e.g., use tax) if it isn't collected by the Internet / remote merchant.

As this CNET News article spells out, state's say their actions are warranted because remote retailers "unreasonably deprive" them of tax revenues. In the state's eyes, remote retailers have an unfair advantage over their local retailers because citizens don't pay the use tax.

Besides, someone's gotta' pay for the fire truck (one, BTW, not used by the remote retailers) in localities.

My colleague, Adam Thierer, has written extensively about this here and here, not only pointing out the complexity of these malingering issues, but in doing so also highlighting the intense desires of states to get at this "honey pot" of revenues.

Through such interstate compacts as the Streamlined Sales Tax Project (SSTP), many states appear willing to work toward most anything, including greater interstate "tax uniformity," to reach new revenue streams. States will even throw Federalism - their own unique sovereignity - under the bus to get there.

Notes Thierer:

...[W]hen supporters of the [SSTP] argue for greater uniformity in the sales tax system, they may just be making a covert effort to sustain higher tax rates and expand the current system to incorporate remote vendors on interstate goods and services. But at what cost? The states are essentially proposing to abandon true federalism and jurisdictional tax competition in exchange for the power to potentially recoup a small amount of tax revenue from interstate sales through a uniform system of third-party tax collection. Sadly, it appears that state and local officials would prefer to create a cozy tax cartel instead of relying on a "laboratories of democracy" model of competition between the states.

Not surprisingly, the Fed seems to have gotten in on the tag-team action, too. Just the other day it reared its avaricious head in, of all things, the FCC's newly released National Broadband Plan.
Recommendation 4.20:

The federal government should investigate establishing a national framework for digital goods and services taxation.

The National Broadband Plan is focused on increasing beneficial use of the Internet, including e-commerce and new innovative business models. The current patchwork of state and local laws and regulations relating to taxation of digital goods and services (such as ringtones, digital music, etc.) may hinder new investment and business models. Entrepreneurs and small businesses in particular may lack the resources to understand and comply with the various tax regimes. Recognizing that state and local governments pursue varying approaches to raising tax revenues, a national framework for digital goods and services taxation would reduce uncertainty and remove one barrier to online entrepreneurship and investment.

A tax-hungry government never bodes well for individual liberty. It is especially damaging to entrepreneurs willing to take risk and innovate. Taking the "Amazon tax" as an example, some companies are closing down their "affiliate" programs because of the costly administrative hassle of collecting the (wildly varying) state / local taxes.

Who suffers the most? The Internet "affiliate," which is more than likely a small business.

In the present spend-and-spend environment, the pressure for revenues will not likely cease soon. If pending court challenges to these new schemes turn out favorably for the states, lookout. The flood will begin, and no one will be able to get on high enough ground to keep from getting swept away.

One can only hope that the economy improves soon. At least then we can smile more easily as the government carts off our hard-earned dollars.

posted by Mike Wendy @ 4:24 PM | Broadband , E-commerce , Generic Rant , Internet , State Policy , Supreme Court , Taxes , The FCC