Internet sales tax would allow states to tax citizens of other states

· April 17, 2018  
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“The art of taxation consists in so plucking the goose as to obtain the largest quantity of feathers with the least possible amount of hissing.” ~Jean-Baptiste Colbert

Should we force businesses to collect sales taxes on online purchases of residents in a different state, encompassing 10,000 unique tax jurisdictions, inducing taxation and regulation without representation? Should states be allowed to create a tax-collecting cartel reaching across their boundaries?

This should be a no-brainer from both a legal and a political perspective, but is being pushed, unfortunately, by liberals in both parties as well as President Trump.

The growth of internet doesn’t make cross-state tax collection constitutional

Today, the Supreme Court will hear oral arguments in South Dakota v. Wayfair Inc. to determine whether states may collect sales taxes from purchasers out of state. The legal problem is obvious. Given that our sales tax is neither a direct tax on the merchant nor on the consumer but rather a tax on the consumer collected by the merchant, it creates a complication when the merchant and consumer are in different states. This complication first began with mail-in catalogs. In 1992 (Quill Corp. v. North Dakota), reaffirming a 1967 decision, the Supreme Court correctly interpreted the Commerce Clause as prohibiting states from collecting such taxes across state lines without authorization from Congress unless the merchant has a store in the state of the purchaser. Now, a bunch of money-hungry states want the Supreme Court to reverse that decision given that the internet is ubiquitous and people purchase things across state lines in the blink of an eye.

The problem is that nothing has changed in the Constitution. The fact that the internet is instantaneous and ubiquitous doesn’t change the fact that the buyers would be paying taxes to an unaccountable government across state lines. It also doesn’t change the political argument that it is extremely complex to collect taxes for 10,000 unique jurisdictions.

Now, obviously, from a legal standpoint, Congress can always authorize states to create a cross-state taxing cartel, but states cannot do so without explicit authorization. This is the one legitimate application of the Commerce Clause. The Commerce Clause of the Constitution has been used as a garbage can of left-wing jurisprudence to grant the federal government infinite power over the citizenry for years. Ironically, the original intent of the Commerce Clause was to serve as a check on state power grabs across state lines in order to protect the people, not as a new power for the feds to wield over the people.

As James Madison noted in a letter to Joseph C. Cabell in 1829, the “power to regulate commerce among the several States” was “intended as a negative and preventive provision against injustice among the States themselves, rather than as a power to be used for the positive purposes of the General Government.”

Our Founders were concerned about a trade war between states, and that was the sole motivation behind the Commerce Clause.

There is no commonsense political argument for cross state taxation

Let’s face it: This is not about solving some problem in the marketplace. The internet is doing just fine without more government taxation and regulation. This is all about state governments that are hungry for more tax revenue for their rapacious welfare states, but are too scared to directly tax their consumers. They can always cut spending or increase the state income tax, property taxes, or other fees if they need revenue. Alternatively, they can convert the sales tax to a direct tax on the consumer or a direct tax on the merchant. Instead, the reason they want to collect an unaccountable pass-through sales tax across state lines is precisely the reason why the Founders deemed it unconstitutional: It’s taxation without representation.

Some so-called conservatives who are pushing a federally sanctioned internet sales tax claim to be bothered by a question of free market fairness. After all, isn’t the current sales tax system unfairly beneficial to online retailers, who offer the same products to consumers as brick-and-mortar stores without having to charge sales tax as the brick-and-mortars do?

Let’s first acknowledge that far from crushing mom-and-pop shops, the internet has actually leveled the playing field for them. The internet has allowed smaller businesses to compete everywhere, even if they lack the capital necessary to build a national network of wholesalers, distributors, and retailers like the Walmarts of the world.

The bill floating around in Congress (H.R. 2193) would encumber online businesses with the technicalities of establishing a tax collection system that would satisfy nearly 10,000 unique tax jurisdictions in this country. That is a recipe for killing jobs and raising the cost of goods. It’s for good reason that in 1992 the Supreme Court referred to such a scheme as a “burden” and a violation of due process. Big online retailers like Amazon are willing to shoulder this burden in return for driving smaller online businesses out of the market or into their own platform. In that sense, this is a consummate example of big government colluding with big business. It should be called the Amazon Enrichment Act. Which is why, contrary to President’s Trump’s suggestion, Amazon has switched sides in this debate now that the company has a physical presence in every state.

Some suggest that new software would allow small businesses to tabulate the taxes instantaneously. But as Mark Faggiano, CEO of a major tax software company observed, there is no system on the market that can “solve the problem of integrating every ‘shopping cart’ platform for selling goods online into one software application” and render the taxes for jurisdictions that distinguish between a KitKat bar, which is not taxed in some places like New York, and a Milky Way, which is taxed.

A race to the bottom of the tax pit

This is the first obvious step toward creating a federal sales tax (built on top of the income tax). Collection, enforcement, and reciprocity of this tax would be so complicated that it would engender yet another fix in the endless cycle of government incompetence. The only way to effectively collect it would be with a uniform national sales tax. There is no question that the internet sales tax state arrangement would be the easiest way for liberals to leverage their much sought-after national sales tax – an entirely new revenue stream.

To the extent that the status quo gives an advantage to online vendors, the interstate tax cartel would overcorrect the problem and hurt online vendors. While brick-and-mortar stores are forced to collect taxes from everyone, they are only subject to the tax of their home state. So, if they are located in a state with no sales tax or a low tax, they collect the lower tax, even if the customer is from a high-tax state. Under the proposal in Congress, online vendors in a state like New Hampshire would still have to collect the high rate of taxes of customers from California. So red-state companies will have to serve as tax collector for high-taxed blue states, thereby destroying the benefit of being in a red state.

It’s further shocking to see that some conservatives think collecting an additional $115 billion in taxes over five years in order to grow the welfare state is a good idea.

Like any other choices in life, there are advantages and disadvantages to different business models. The logistics of the internet might make the tax burden easier for internet commerce, but there is the drawback of shipping costs. That is part of doing business, and with the advent of the internet, everyone needs to adapt and innovate to stay competitive. Walmart is doing just fine, and still the internet has served as the great equalizer for start-up companies that lack the economies of scale to compete with the huge retailers. The playing field is perhaps more level than it’s ever been, thanks to the internet.

To allow cross-state taxation under the current system is the definition of tyranny and embodies what our Founders fought regarding the Stamp Act and Tea Act. If states are allowed to tax people in other states, it will set a dangerous precedent that will raise taxes across the board in the most unaccountable manner. There’s little money in sales tax; what they really want is to go after business and individual taxes. It will allow states to raise each other’s taxes rather than compete for lower taxes.

The cruel irony is that Democrats are letting Republicans take the lead on this issue precisely because they know it is an unpopular proposition that will cement their victory in November.


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Author: Daniel Horowitz

Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.