Imagine having to pay taxes to a state you don’t live in just
because you do business with someone who does. If you’re an
Internet retailer, you don’t have to imagine. You have to pay.
New York Governor David Paterson (D) signed legislation last year
requiring non-New York companies like Amazon and Overstock.com to
pay New York sales taxes. The legislation is now being challenged
in court.
The polite term for this is taxation without representation.
Neither Amazon nor Overstock has any physical presence in New
York State. But some of their “affiliate” websites do. An
affiliate is a website that links to, say, Amazon products, and
receives a small percentage of any sales resulting from those
links. Call it a finder’s fee.
Affiliates are not owned by Amazon. They are independent
entities. Yet Governor Paterson and the New York legislature
maintain that such tenuous connections to their state are enough
to force Amazon and Overstock to collect and pay sales taxes on
any products they ship to New York.
This is not good policy under any circumstances. During a
recession, it’s destructive. When the new law came into effect
last June, Overstock severed ties with more than 3,400 New
York-based affiliates.
Paying taxes to a government that provides you with services, and
where you can vote for or against the politicians setting tax
rates, is one thing. But to pay taxes when you get no benefits
and no democratic say is simply unfair.
Nor is it feasible. The more states that join in, the more
expensive it becomes for companies to do business across state
lines.
Already, five states are jumping on the bandwagon. California,
Connecticut, Hawaii, Minnesota, and Tennessee all have Internet
tax proposals in the pipeline, relying on the
presence-by-affiliate argument. More are sure to follow.
Add in cities and counties, and we have about 11,000 sales tax
jurisdictions in the United States. Every single one of them
could use New York’s logic against outside Internet retailers.
As April 15 approaches, we need no reminder of the difficulties
of complying with the tax code. State and federal returns are bad
enough on their own. Imagine filling out 11,000 forms every year.
It is true that sales taxes are simpler than income taxes. But
11,000 forms are 11,000 forms. If New York’s tax precedent
becomes the norm, that’s what companies across the country may
have to go through.
New York’s thirst for revenue is not surprising. The state is in
poor fiscal shape. The budget deficit is estimated to reach $13.7
billion this year. Revenues are down and spending keeps going up,
even after targeted budget cuts.
The real surprise is that courts haven’t thrown out Gov.
Paterson’s sales tax scheme. According to Supreme Court
precedent, it is unconstitutional. The 1992 Quill v. North
Dakota decision confirmed that a state may only collect
sales taxes from companies that are actually located in that
state.
New York and other revenue-hungry state governments would like to
do away with Quill. They prefer what policy wonks call
destination-based taxation. That means that everything
that New York consumers purchase would be subject to sales tax,
no matter where the seller is.
A better approach is origin-based taxation. Companies
only collect and pay sales taxes where they have a physical
presence. Not only is it more fair, it is more feasible.
Companies pay one sales tax, not anywhere from 50 to 11,000.
Origin-based taxation also allows for tax competition, which
incentivizes states to rein in their worst impulses. If a state
charges excessive rates, companies can leave for another state
with more reasonable rates.
Internet retailing is one of the few sectors of the economy still
growing during this recession. If destination-based taxation
prevails, it will cost precious jobs. Consumers will end up
paying more for the same goods; their hard-earned dollars won’t
go as far as they would under origin-based taxation.
Governor Paterson’s Internet taxation proposal is unfair
unworkable, and bad for consumers and businesses alike. Courts
should throw it out.
