The Tax and Spend Spectator

No Internet Taxation Without Representation

The "fairness" argument for an Internet tax was always weak.

By From the July-August 2013 issue

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THE KNIGHTS of the Round Table searched for the Holy Grail. Alchemists in the Middle Ages sought the secret of turning lead into gold. So too have politicians of all ages pursued their El Dorado: the tax that can be levied on people who cannot vote them out of office, taxation without representation.

The Romans squared this circle by looting the provinces, which worked well for a while. Britain hoped to tax the American colonies, but certain objections were raised. This spring the United States Senate believed it had finally found the answer. A majority voted to allow one state to impose its sales tax on a business operating in a different state. L.L. Bean, based in Maine, which sells outdoor gear via catalogue and the Internet, will—if this new law passes the House of Representatives unamended—be forced to collect and remit sales taxes for the other 49 states and 566 Indian nations.

Mayors and governors who cannot be bothered to rein in spending lust after the idea of taxing the faraway “other.” But in 1992 the killjoys in the Supreme Court ruled 8-to-1 that a state could only tax those businesses that had a physical “nexus” within its boundaries. It cannot tax across state lines. No taxation without representation. But the Court gave a limp-wristed reason for its ban: Such taxes would be too burdensome to impose. So for the last 20 years, incompetent city and state politicians have worked night and day, not to reform their pensions or bloated payrolls, but to convince Congress, as arbiters of “interstate commerce,” to pass a law allowing cross-border taxation.

Advocates of this idea have argued that states and cities are losing out on $23 billion annual revenue. Thus they insist their law allowing cross-border taxes will raise that amount in just the first year, and more in the future. How then did the Senate vote 69 to 27 for a $23 billion tax hike? Twenty Republicans joined 49 Democrats in voting for this legislation.

Democrat senators have always supported this effort. Their party is controlled by three overlapping factions: big city machines, labor unions (now largely public employee unions that control the aforementioned mayors), and trial lawyers. But why in the world did 20 Republican senators vote to create another revenue source for the backbone of the Democrat party?

THOSE LOBBYING for the bill—tax-hungry unions and the mayors who represent them—realized that their case would not be persuasive to Republican legislators. So they dragooned businessmen and women into the fight by making an offer they could not refuse. “You have a nice shop here. It would be a shame if something—like a property tax hike—were to happen to it. Why don’t you go tell your Republican delegation that we should collect taxes on Internet sales from other states instead?” And quite understandably they did.

The fairness argument was always weak. Why should L.L. Bean pay taxes in Alabama? Their workers do not use Alabama schools or police or fire protection. Their products are shipped by air or truck, and they pay the fuel taxes that build Alabama roads. If you buy $100 of books in Salt Lake City at the local bookstore, you pay $6 in sales tax. If you go to your computer and buy the same books from the nice folks Amazon, the online retailer eats more than $6 in shipping. There are only a few products—camera equipment, for instance—whose value is high enough and weight low enough that shipping them instead of paying sales tax saves the retailer money. Any state could cap the sales tax on such products so as to not handicap their own retailers. But politicians are not trying to protect their local retailers. They want more cash.

This was never clearer than when a delegation of Main Street retailers met with a Southern governor and explained that, while they are good Republicans and hate, hate, taxes, this was simply a question of fairness. The governor offered to tax out-of-state businesses, but only if taxes for in-state retailers were cut, keeping the legislation revenue-neutral. An equal burden would be imposed, and the very businessmen standing before him would see a sales tax cut. The group hemmed and hawed. The governor had offered to address all their stated concerns. But they were not there on their own behalf. This solution would not bring in the cash demanded of the government labor unions and mayors. The retailers were suffering from Stockholm syndrome, identifying with those who threatened them.

“Fairness” could be achieved by having each state, city, and Indian tribe tax all Internet and catalogue sales made by retailers in their respective jurisdictions. Maine could tax all the sales of L.L. Bean to customers in the other 49 states. No taxes would be imposed on individuals or businesses outside state borders. Federalism would not be damaged and revenue would be raised. But the new taxes would be too much in evidence. Every Internet retailer in Tennessee would be livid at the idiot who thought up such a scheme. That is why no states have done it. They don’t just want more money. They want more money from taxpayers safely stuck in other states.

This agenda is about weakening and breaking down the present prohibition on taxing across state lines. The legislation had to be rushed past the Senate, avoiding regular order and a committee hearing. At the last moments, the Financial Services Roundtable, now run by former Republican governor Tim Pawlenty, pointed out that this law would allow states to impose sales taxes on 401k contributions. Legislation to limit the ability of one state to export its income taxes, titled the Business Activity Tax Simplification Act, has also been before Congress. Rep. Bob Goodlatte of Virginia is the chief sponsor. Those who claimed they only wanted fairness in sales tax collection announced bluntly that any effort to protect against future income tax cross-border raids would be considered a “poison pill.”

Allowing cross-border taxation lowers the incentive for businesses to move into low-tax red states, which is why, all talk of “fairness” aside, proponents of such legislation support it. Tax competition forces California and Michigan to choose between reform and collapse. Taxing businesses across state lines would remove that dynamic.

The battle now moves to the House. Speaker Boehner has pronounced himself no fan of this new tax scheme and promised that the Senate bill will go through “regular order” in the Judiciary Committee, chaired by Goodlatte. This time Americans with IRAs and respect for federalism may be paying attention. 

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About the Author

Grover G. Norquist is the president of Americans for Tax Reform.