{"id":19933,"date":"2018-04-04T10:06:11","date_gmt":"2018-04-04T14:06:11","guid":{"rendered":"http:\/\/www.megalextoria.com\/wordpress\/?p=19933"},"modified":"2018-04-04T10:08:52","modified_gmt":"2018-04-04T14:08:52","slug":"the-internet-taxation-fight-isnt-really-about-internet-taxation","status":"publish","type":"post","link":"https:\/\/www.megalextoria.com\/wordpress\/index.php\/2018\/04\/04\/the-internet-taxation-fight-isnt-really-about-internet-taxation\/","title":{"rendered":"The “Internet Taxation” Fight Isn’t Really about Internet Taxation"},"content":{"rendered":"

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One of the key principles of a free society is that governmental power\u00a0should be limited by national borders<\/a>.<\/p>\n

Here\u2019s an easy-to-understand example. Gambling is basically illegal (other than\u00a0government-run lottery scams<\/a>, of course) in my home state of Virginia. So they can arrest me (or maybe\u00a0even shoot me<\/a>) if I gamble in the Old Dominion.<\/p>\n

I think that\u2019s bad policy, but it would be far worse if Virginia politicians also asserted extraterritorial powers and said they could arrest me because I put a dollar in a slot machine during my last trip to Las Vegas.<\/p>\n

And if Virginia politicians tried to impose such an absurd policy, I certainly would hope and expect that Nevada authorities wouldn\u2019t provide any assistance.<\/p>\n

This same principle applies (or should apply) to taxation policy, both globally and nationally.<\/p>\n

On a global level, I\u2019m a\u00a0big supporter<\/a>\u00a0of so-called tax havens. I\u2019m glad when places with pro-growth tax policy attract jobs and capital from high-tax nations. This process of tax competition\u00a0rewards good policy and punishes bad policy<\/a>. Moreover, I don\u2019t think those low-tax jurisdictions should be under any obligation to enforce the bad tax laws of uncompetitive countries.<\/p>\n

There\u2019s a very similar debate inside America. Some states\u2014particularly those with punitive sales taxes\u2014want to force merchants in other states to be deputy tax enforcers.<\/p>\n

I\u2019ve\u00a0written about this topic<\/a>\u00a0and I think even my writings from\u00a02009<\/a>\u00a0and\u00a02010<\/a>\u00a0are still completely relevant. But let\u2019s check some other sources, starting with\u00a0a column<\/a>\u00a0in the\u00a0Wall Street Journal<\/em>. It\u2019s from 2016, but the issue hasn\u2019t changed.<\/p>\n

The state of Alabama is openly defying the U.S. Supreme Court in an effort to squeeze millions of dollars of tax revenue from businesses beyond its borders. \u2026This unconstitutional tax grab cuts to the heart of the Commerce Clause, which gives Congress the power to regulate trade “among the several States.\u201d\u00a0Alabama\u2019s regulation directly contravenes the Supreme Court\u2019s 1992 ruling in\u00a0Quill v. North Dakota<\/em>. In that case, the court held that North Dakota could not require an out-of-state office-supply company to collect sales taxes because the firm had no offices or employees there. \u2026Alabama\u2019s revenue commissioner, Julie Magee, is putting forward an untested and suspect legal theory: The state claims that if its residents buy more than $250,000 a year from a remote business, then the seller has an \u201ceconomic presence\u201d\u2026 There are around 10,000 sales-tax jurisdictions in the U.S., with varying rates, rules and holidays, and different definitions of what is taxable. Keeping track of this ever-changing patchwork is a burden, and forcing retailers to scramble to comply would profoundly hinder interstate commerce in the Internet age.”<\/blockquote>\n

And here are some excerpts from\u00a0a column<\/a>\u00a0published that same year by\u00a0Fortune<\/em>.<\/p>\n

When politicians call for \u201cfairness,\u201d it\u2019s 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\u2014a simple tax grab\u2026\u00a0states are constitutionally prohibited from collecting sales taxes from retailers that have no presence within their borders\u2026thanks to the U.S. Supreme Court\u2019s 1992 ruling in\u00a0Quill Corp.\u00a0<\/em>v.\u00a0North Dakota\u2026\u00a0<\/em>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\u2014usually 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\u2014and roughly 10,000 jurisdictions have such taxes. Complying with this convoluted system would necessarily raise costs for consumers and stifle competition.”<\/blockquote>\n

And the debate continues this year. The\u00a0Wall Street Journal<\/em>\u00a0editorialized against<\/a> extraterritorial state taxing last week.<\/p>\n

A large faction of House Republicans are pressing GOP leaders to attach legislation to the omnibus spending bill that would let states collect sales tax from remote online retailers. South Dakota Rep. Kristi Noem\u2019s legislation\u2026would let some 12,000 jurisdictions conscript out-of-state retailers into collecting sales and use taxes from their customers.\u00a0\u2026Contrary to political lore, sales tax revenues have been increasing steadily in states with healthy economies. Over the past five years, Florida\u2019s sales tax revenues have grown 27%. South Dakota\u2019s are up by nearly 30% since 2013. \u2026Twenty or so states have adopted \u201cclick-through\u201d taxes to hit remote retailers that have contracts with local businesses. In 2016 South Dakota invited the High Court to revisit\u00a0Quill\u00a0<\/em>by extending its sales tax to out-of-state sellers. \u2026the Court could enable broader taxation and regulation of out-of-state businesses. This is what many states want to happen. \u2026Raising taxes on small business and consumers won\u2019t be a good look for Republicans in November, nor an inducement for investment and growth.”<\/blockquote>\n

Jeff Jacoby also just wrote on this topic for\u00a0his column<\/a>\u00a0in the\u00a0Boston Globe<\/em>.<\/p>\n

First, the flow of interstate commerce must not be impeded by one state\u2019s impositions. And second, there should be no taxation without representation; vendors should not be liable for taxes in states where they have no vote or political recourse. The Supreme Court upheld this \u201cphysical connection\u201d standard in a 1992 case, Quill v. North Dakota<\/em>.\u00a0\u2026the high court should reaffirm it. In the 26 years since the justices rebuffed North Dakota\u2019s claim, the case against allowing states to exert their taxing power over remote sellers has grown even stronger. \u2026there are now\u00a012,000 taxing jurisdictions\u2014not only states, counties, and cities, but also parishes, police districts, and Indian reservations. A lone online seller, unprotected by the Quill rule, could be obliged to remit taxes to any combination of them, with all their multitudinous rules and definitions, tax holidays, and filing deadlines. \u2026South Dakota can impose onerous burdens on companies operating within its borders, but not on vendors whose only connection to the state is that some of their customers happen to live there. The court got it right the first time. No merchant\u2014whether selling online, via mail order, or in a traditional shop\u2014is obliged to be a tax collector for states it doesn\u2019t operate in.”<\/blockquote>\n

And here are some passages from Jessica Melugin\u2019s\u00a0article<\/a>\u00a0for\u00a0FEE<\/em>. She makes the key point that extraterritorial tax powers would undermine\u2014if not cripple\u2014the liberalizing impact of tax competition.<\/p>\n

\u2026the\u00a0Remote Transactions Parity Act\u00a0(RTPA)\u2026seeks to get rid of that physical presence limit on state taxing powers.\u00a0It would let states reach outside their geographical borders and compel another state\u2019s business to calculate, collect, and remit to that first state. \u2026the long-term effect is that this arrangement will lessen the downward pressure on taxes between jurisdictions.\u00a0Think of it like this: it\u2019s the difference between driving your car across the D.C. border to Virginia to fill up with lower Virginia gas taxes\u2014that\u2019s how it works now and that\u2019s what keeps at least some downward pressure on D.C. tax rates. If D.C. made the rate high enough,\u00a0everyone<\/em>\u00a0would exit and fill up in Virginia.\u00a0But if the\u00a0approach in the RTPA is applied to this thought experiment, it would mean that when you pull into that Virginia gas station, they look at your D.C. plates and charge you the D.C. gas tax rate. \u2026it\u2019s a makeshift tax cartel among the states. \u2026the RTPA is a small-business killer\u2014which is why big box retailers support it.\u00a0It crushes small competitors with compliance costs.\u00a0State politicians are for it because they\u2019d rather tax sellers in\u00a0other<\/em>\u00a0states who can\u2019t vote them out of office.\u00a0Consumers will be left with less money in their pockets and fewer choices.”<\/blockquote>\n

By the way, there are some pro-market people on the other side. Alex Brill of the American Enterprise Institute\u00a0has written<\/a>\u00a0in favor of extraterritorial taxation.<\/p>\n

\u2026lawmakers have proposed legislation to allow (not require) states to collect sales tax on goods purchased from out-of-state sellers. \u2026critics of this legislation\u2026argue\u00a0that \u201cinternet freedom is under attack by politicians willing to distort markets and tilt the playing field toward their favored businesses.\u201d Internet freedom is certainly not being \u201cattacked\u201d by a policy to improve enforcement of existing tax liability. Second, these critics oppose the legislative reform based on the belief that just because the internet benefits people, online retail activities should be advantaged by public policy. If public finance were based on this type of specious logic, we would have a tax code far more unfair and distorted than it currently is.”<\/p><\/blockquote>\n

I actually agree with both of his arguments. Giving states extraterritorial tax powers isn\u2019t an attack on the Internet.\u00a0And I also agree that tax policy\u00a0shouldn\u2019t provide special preferences<\/a>.<\/p>\n

But neither of his points address\u00a0my concern<\/a>\u00a0that extraterritorial tax powers give too much power to governments and undermine tax competition.<\/p>\n

Unless he\u2019s going to argue that Nevada\u2019s\u00a0no-income-tax status<\/a>\u00a0is \u201cdistorted\u201d compared to\u00a0California\u2019s punitive system<\/a>. Or unless he\u2019s going to argue that Delaware\u2019s no-sales-tax status is \u201cunfair\u201d compared to New Jersey\u2019s onerous system.<\/p>\n

For more information, here\u2019s\u00a0my speech<\/a>\u00a0to congressional staffers from 2012.<\/p>\n