Internet Sales Tax Rises From the Dead

--Some legislation will just not stay dead.

A proposal by “small government” Republican congressman Bob Goodlatte would enable states to collect taxes on retailers who do business in their state– currently, they can only tax retailers who have a physical presence in their state.

This means that if your business is incorporated in Kentucky and you sell to a customer in New Hampshire, your customer would pay Virginia’s sales tax on your product, but New Hampshire would have “auditing power.”

The Wall Street Journal reports:

The Retail Industry Leaders Association, whose members include Wal-Mart Stores Inc. and Best Buy Co. Inc., said it welcomed “an open debate in the House aimed at ensuring that all retailers can compete on a level playing field” but said it would “press for changes that achieve true parity at the point of sale.”

“Level the playing field” of course, is a dog whistle for cronyism. What it really means is: “someone is doing business more efficiently than I am; I must demand the government prevent this abomination.”

Goodlatte’s proposal, only the latest in a long line of internet sales tax schemes, would make states use the sales tax base of the retailer’s state and a single tax rate determined by the consumer’s state.

This is a problem,however, for Rep. Ron Wyden of Oregon, which has no sales tax. Wyden is concerned Oregonians would have to pay the sales tax rate of some other state since the new law would mandate that tax is collected somehow, regardless of where the transaction takes place. According to the proposed rules:

That reach still would be an issue, however, in five states without sales taxes—Delaware, Montana, New Hampshire, Oregon and Alaska. Retailers there would either apply the tax base of the state where they have their largest receipts or report sales to their customers’ states to help those states enforce taxes their residents are supposed to be paying but typically don’t.

Why on earth would they apply the tax base of the state where they have their largest receipts? If a customer’s state has no income tax, why would they still have to collect?

This quirk of the proposed law makes it clear it’s purpose is not to curtail revenue losses in individual states… it’s about big rent seekers crushing competition from small online retailers.

Which is  probably why Amazon (who already collect sales taxes in most states) loves it.

If you’re an online consumer, this means shelling out more money to states you may never have set foot in; if you own an online retail business, it means more expense, more paperwork, and more ways for giants like Amazon to destroy your livelihood.

As Scott Shane pointed out in Entrepreneur: “Unfortunately, the burden of collecting an online sales tax wouldn’t lie in calculating the rates, but in collecting and paying the tax monthly to 45 different states, each with their own procedures, inquiries and audits for business owners to follow.”

That can add up to a substantial burden for online retailers that brick-and-mortar businesses don’t have to deal with… so much for “fairness.”

Though the bill is unlikely to pass during the upcoming “lame duck” session, it has broad support among Republicans. It’s almost like they don’t actually care about freedom. Weird, I know.

If you’re a go-getter, you can sign this petition to scare politicians into keeping this thing dead and buried where it belongs.

If you’re interested in finding out what the government is really up to, check out this piece by Christine Harbin of Americans for Prosperity.

Why a National Internet Sales Tax Is a Really Bad Idea

Christine Harbin

The premise of fairness doesn’t hold up.

When politicians call for “fairness,” it’s important to take a closer look at their definition of fair. See, for example, the nationwide push in state capitols to slap online sales taxes on out-of-state retailers—a simple tax grab disguised as a matter of high-minded principle.

Legislators in at least a dozen states are currently trying to pass such bills. This effort is being organized by the National Conference of State Legislatures, which has made the enactment of online sales taxes—so-called “E-Fairness legislation”—one of its top priorities. The group claims this would ensure that online and brick-and-mortar retailers play by the same tax rules. But it would do nothing of the sort.

Currently, states are constitutionally prohibited from collecting sales taxes from retailers that have no presence within their borders. That’s thanks to the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota, in which a unanimous Court held that a business must have a “substantial nexus” in a state in order for it to levy state and local sales taxes.

This swiftly dashed state legislators’ dreams of increasing revenue by taxing businesses beyond their own borders. Their frustration has only grown with the proliferation of online shopping, which has opened up a new frontier largely beyond the tax collector’s grasp.

But hope springs eternal, and state lawmakers are now trying a second time. Justice Anthony Kennedy opened the door last March to reversing his vote in Quill Corp., inspiring the proposals now under consideration in statehouses across the country.

If they pass, affected businesses are all but guaranteed to sue in federal court. Alabama’s deputy revenue commissioner, Joe Garrett, frankly admitted this to the Wall Street Journal: “We’re confident that some remote sellers will not comply and therefore it will lead to litigation… We have been very open about what we’re doing.” In other words, officials want the Supreme Court to intervene and review its 1992 decision if different lower courts reach differing conclusions.

Even if that doesn’t work, the would-be tax-hikers have a backup plan. The Supreme Court argued in Quill that Congress could render this issue moot by passing a national sales-tax framework. Justice Stevens wrote for the Court: “Congress is now free to decide whether, when, and to what extent” states could burden out-of-state sellers with taxes.

If the Supreme Court stays silent on this issue, state legislators and governors hope to force Congress to act. That’s why they’re trying to pass a wide variety of competing and contradictory laws. Utah State Senator Curt Bramble, the president of the National Conference of State Legislatures, told The Salt Lake Tribune in January that this patchwork approach may spur Congress to pass a national online sales-tax scheme.

Consider some of the state proposals. Some, such as Louisiana’s and South Dakota’s, force out-of-state retailers that pass certain sales thresholds within their states to collect sales taxes from local buyers. Colorado forces online retailers to hand over a list of in-state customers, who are then notified by local tax authorities.

Utah’s proposal is among the worst. It would unilaterally redefine “in-state sellers” to include out-of-state business that ship products via third-party vendors, such as FedEx or UPS. The moment those vendors enter the state, the original seller would be classified as a Utah company, and would thus owe sales taxes on purchases by state residents.

These and other proposals are now winding their way through state legislatures. Some have already passed. As others do, they will undoubtedly cause nationwide economic disruptions, as businesses try to identify and comply with the relevant laws. Apparently that’s a small price to pay for the state lawmakers who hope to benefit from the resulting revenue windfall.

Yet even if they get their way, the fundamental premise behind this campaign—fairness—doesn’t hold up. Any national online sales-tax system will burden online retailers to a degree never felt by brick-and-mortar businesses. Local businesses only have to deal with a limited number of sales taxes—usually only the state, county, and local levies that apply to specific stores. Online retailers, on the other hand, would have to calculate and apply sales taxes across the entire nation—and roughly 10,000 jurisdictions have such taxes.

Complying with this convoluted system would necessarily raise costs for consumers and stifle competition. While software exists to help ease this burden, the trade association True Simplification of Taxation estimates it will cost businesses between $80,000 and $290,000 to implement, with further annual maintenance costs of between $57,500 and $260,000. That’s a pittance for major online retailers, but a fortune for smaller companies and startups.

The problems may be even worse if states pass their respective bills and neither Congress nor the Supreme Court take the bait. Online retailers would then be forced to deal with differing state sales-tax systems, which would be even more unfair than a national mandate. Some companies—especially smaller firms—may even stop selling in states where the burdens are worst.

Where’s the fairness in any of this? The evidence indicates that a level playing field won’t follow on the heels of these state proposals—just the opposite. No matter what state they live in, Americans everywhere should recognize this coordinated campaign for what it truly is: a thinly veiled attempt by politicians to dig even deeper into their constituents’ pockets.

P.S: Christine Harbin is director of federal affairs and strategic initiatives at Americans for Prosperity.

P.S.S: This essay originally appeared in Fortune magazine.

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