With state budgets bleeding red ink and governors scrambling for new revenue sources, pressure is mounting for Congress to clear the way for states to force sellers to collect sales taxes on Internet purchases.
Sen. Mike Enzi (R-WY) and Rep. William Delahunt (D-MA) were expected at press time to introduce a bill soon—as they have done in previous sessions of Congress—to clear the constitutional hurdle that keeps Internet commerce sales tax-free for most Americans.
“By changing the law to create an Internet sales tax, Democrats in Congress will erode one of our nation’s core sources of entrepreneurship, jobs, and economic growth: e-commerce,” said Vince Vasquez, a senior policy analyst with the San Diego Institute for Policy Research.
Online Sellers Wary
Some states, including California, require residents to report purchases they make online and remit the proper amount of sales taxes. Because the tax collection depends on self-enforcement, few shoppers comply.
As a result, a few states in recent years have passed bills forcing companies to collect sales taxes on goods purchased online—most prominently in 2008, when New York’s state legislature passed the so-called “Amazon Tax.” The law requires online retailers such as Amazon.com and Overstock.com to collect sales taxes from customers who reside in New York.
Amazon predicted the trend in its April 2004 annual report to shareholders, warning of its harmful effects on e-commerce.
“A successful assertion by one or more states … that we should collect sales or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our retailers,” the report stated, adding. “various taxes upon Internet commerce could create administrative burdens for us and decrease our future sales.”
Court: Congress Can Decide
Legally standing in the way of this new taxing stream is the Commerce Clause of the U.S. Constitution, which prevents a state from compelling a business not physically in the state from collecting its taxes, a concept called “nexus.”
However, the U.S. Supreme Court ruled in the 1992 Quill v. North Dakota case Congress could waive that nexus requirement under its constitutional powers to regulate interstate commerce.
Since Amazon has offices in New York, it’s required to collect sales taxes for the state. Overstock, however, responded by closing its offices in the state so it would not be saddled with the tax-collecting burden. Company officials have since hinted Overstock would follow suit in every other state that imposes an online sales tax.
‘Streamlining’ Sales Taxes
Twenty-two states have joined a group called the Streamlined Sales Tax Project (SSTP), pledging to “simplify and modernize” their sales taxes and collect them on Internet sales if Congress waives the nexus requirement.
Pete Sepp, vice president for policy and communications at the National Taxpayers Union in Alexandria, Virginia, says he doubts the SSTP will simplify taxes.
“The truth is, SSTP remains complex because those designing it continue to be conflicted over sticky issues like nexus and reciprocity,” Sepp said. “The issue of tax competition is especially important to us. If the federal government gives its blessing to a nationwide sales tax scheme run by the states, one major competitive element of tax policy will begin to look more like a rigged game where everybody wins—except taxpayers.”
Bill a Dead Letter?
George Pieler, a senior fellow with the Institute for Policy Innovation in Lewisville, Texas, doubts the predicted Enzi-Delahunt bill will get very far.
“That bill has been rumored for some time and still hasn’t appeared,” Pieler said. “One might think it ironic to take seriously a bill that would so seriously dampen consumer spending at a time when Obama is trying to stimulate it.
“But this year, Obama and his allies seem willing to try anything they can get away with,” Pieler added. “My own guess is this is another round of hot air from the SSTP folks and their allies, and it’s too likely to rile up the ‘little people’ Obama keeps telling us he isn’t going to tax.”
‘Bad Deal for Consumers’
Peter Klein, a technology and economics expert and associate professor of organization and management at the University of Missouri, says overturning Quill and opening the door to 50 different sales tax rates would be a “bad deal for consumers.”
“Internet sales taxes are a bad deal because [ordinary] sales tax rates are already too high,” Klein said. “The mechanics of online collection can be tricky, because each vendor would have to track its customers’ purchases by state and deal with 50 state tax authorities.
“That’s not a big deal for Amazon, but is a significant cost of doing business for smaller firms—of which there are tens and possibly hundreds of thousands,” Klein added.
Vasquez notes overturning Quill would not only remove the constitutional hurdle for states to collect Internet sales taxes but also would let cities and counties do so. With thousands of tax districts in the United States, such a scheme would “massively raise the costs to operate an e-commerce business.”
“Lawmakers who support the collection of an Internet sales tax will destroy economic activity and kill jobs,” Vasquez said. “Keeping the status quo on sales tax collection is good public policy.
“Most local and state taxes and fees allow for exemptions or special conditions for certain types of businesses and entities, such as small businesses, independent contractors, nonprofits, churches, and charitable organizations,” Vasquez added. “So why not Internet entrepreneurs and businesses?”
James G. Lakely ([email protected]) is a research fellow at The Heartland Institute and managing editor of InfoTech & Telecom News.