Taxing E-Shoppers

26 Dec 2007

Just in time for the holidays, Congress is reviving a plan to increase tax collections on Internet consumers. Congressman William Delahunt's (D., Mass.) bill, subject of a recent House Judiciary hearing, would give new powers to America's tax collectors.

Right now, online stores that don't have a building in your state don't have to collect state and local taxes on your purchases. That's because of a 1992 Supreme Court decision called Quill. The Supremes ruled that forcing such obligations on companies with no physical presence in a state could cripple interstate commerce. They also ruled that Congress can have the last word on this question under the Constitution's commerce clause.

Mr. Delahunt's bill would make mandatory the inappropriately named "Streamlined Sales and Use Tax Agreement," forcing all but the tiniest businesses to answer to every one of America's 7,500 taxing jurisdictions. If making a small Web operator calculate, collect and remit taxes to every locality where he has a customer doesn't sound like "streamlining," wait, there's more.

Each merchant would also have to submit to audits from governments coast to coast. And while "only" 7,500 state and local governments currently collect sales taxes in the U.S., more than 22,000 other governments can choose to collect them in the future, and there's no limit on the creation of new taxing entities. Did we mention that the "streamlined" plan allows every jurisdiction to create two separate tax rates, depending on the good or service sold?

Anticipating growth in government and complexity, the plan limits the tax collectors to two rates per zip code. Multiply that by America's 43,000 zip codes and small merchants could potentially have to keep track of 86,000 different tax rates, depending on what they sell and to whom. But what about nine-digit zip codes? Could governments create different rates within each one? Yes indeed.

Believe it or not, it gets worse. The board of state and local tax collectors that administers the "streamlined" plan recently amended the agreement. Now the plan would allow some states to choose whether to tax online purchases at the seller's address or the buyer's, depending on whether they're in the same state. The end result will be different tax rates for in-state and out-of-state vendors -- a clear Constitutional violation.

This change is reason enough for Mr. Delahunt to withdraw his bill, but there are others. Most states, the intended beneficiaries of this new tax bureaucracy, have not endorsed the agreement. Money-hungry revenue departments have largely failed to convince their home legislatures to sign off. So they've gone to Congress to whine about revenue "lost" to e-commerce transactions. We like Presidential candidate Fred Thompson's view of similar claims by federal bureaucrats: "It ain't lost. It's in my pocket."

The fact is that our various levels of government have been doing just fine in the era of electronic commerce. State and local tax collectors have enjoyed 18 consecutive quarters of increasing revenues. A Tax Foundation analysis shows that, even after adjusting for inflation, state and local tax revenues have increased almost 48% since 1992, when Quill was decided. Throw in the generous federal-to-state transfers, and the states and locals are now collecting almost $2 trillion annually. For consumers, on the other hand, sluggish retail sales demonstrate that Congress's timing could not be worse.

~ Link ~