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Conservatives Awaken: Nothing Is Conservative About State Tax Collection on Internet Sales

Posted By David S. Addington On April 21, 2013 @ 1:07 pm In Featured | Comments Disabled

The Senate soon will take up ill-advised legislation (S. 743) misnamed the “Marketplace Fairness Act” to authorize every state to force out-of-state businesses to serve as the state’s sales tax collector, overruling the U.S. Supreme Court’s 1992 decision in Quill Corporation v. North Dakota. As Senator Kelly Ayotte (R-NH) said on March 21, 2013, with regard to this proposed exercise of the congressional power to regulate interstate commerce:

There is absolutely nothing conservative about this proposal because, again, what this is about is officials in cash-strapped States across the country looking for new ways to plug their budget holes.

The 1992 Quill Corporation decision protects out-of-state businesses that have no facilities or employees in a state, but receive orders by Internet, mail-order catalog, or telephone from in-state customers, often called “remote sales.” The Supreme Court held that, under the Constitution’s clause authorizing Congress to “regulate commerce…among the several states,” a state could not force those out-of-state businesses to collect the state’s sales tax on remote sales. However, the Court made clear that Congress could, if it wished, pass a law to authorize the states to impose that tax collection requirement on out-of-state businesses. Thus, Senators who wish to authorize states to require out-of-state businesses to serve as their tax collectors have introduced S. 743.

Like the money-hungry federal government, many state governments have financial and political interests in getting their hands on more and more money to grow their governments. It is not surprising that many of those state governments find out-of-state businesses to be lucrative and politically easy targets for tax legislation.

Take, for example, a company whose workforce and warehouses are in New Hampshire, and which has no contacts with Illinois other than taking remote sales orders over the Internet. If, and only if, S. 743 were enacted, the Illinois politicians could order the New Hampshire company to collect sales tax on those remote sales and send the taxes to the Illinois state government.

The Illinois politicians would have nothing to fear, because the damaging effects of the Illinois tax action fall on the New Hampshire company, in the form of an increase in the price of the company’s goods or a cut in its profit margins, or both. And, of course, the New Hampshire employees who understand what the Illinois government just did to them vote in New Hampshire, and not Illinois. Moreover, the Illinois consumers who would pay Illinois state sales taxes to the New Hampshire company, for subsequent forwarding to the Illinois treasury, would likely not understand that their payment of sales tax to the New Hampshire company is the result of a new taxation decision under S. 743 by their home state’s governing officials.

The truth of S. 743 is that all the politicians get to hide from the consequences of their own tax decisions. The federal politicians in the U.S. Senate who vote for S. 743 get to claim that they are not responsible for the tax hikes on Internet sales because “we didn’t impose taxes on Internet sales; the states did.”

Indeed, the federal politicians are so worried that somebody will figure out that their votes made taxes on remote Internet sales possible that they put a feels-good-but-does-nothing provision in section 3(d) of the bill that says “[n]othing in this Act shall be construed as encouraging a State to impose sales and use taxes on any goods or services not subject to taxation prior to the date of the enactment of this Act”—which, of course, leaves states perfectly free to impose the new taxes that the federal politicians authorize but claim not to be encouraging. Similarly, the state politicians get to claim, “we always had a state sales tax, so we did not raise taxes—we just had the out-of-state companies collect them, when they were not collecting them before.”

Do not be fooled. The bottom line of S. 743 is more money out of the pockets of people who buy goods over the Internet, by catalog, or by telephone—which is to say most people. That money goes straight into the coffers of state governments. Less money in the pockets of people, more money for big government—that’s the meaning of S. 743.


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