A Really Bad Idea: Taxing Internet Commerce

On April 17, the U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair, Inc.; the decision is due in June.  The case deals with e-commerce, specifically the taxing of sales done over the internet.  South Dakotans feel that the internet is bilking them of sales tax revenue and that e-commerce is hurting their brick-and-mortar retailers.  So South Dakota wants internet "retailers" in other states to collect sales taxes for them.

According to the Sales Tax Institute, there are currently 45 states that "impose a general sales tax."  Each of those states also imposes a "use tax," which is what one is supposed to pay when using the net to buy stuff from out-of-state vendors.  But the states are abject failures at collecting their use taxes; enforcement of the use tax is a joke.  Hence the movement to tax out-of-state sales on the internet.

If the Court decides in South Dakota's favor, the internet retailers in the five states that don't have sales taxes will be required to collect sales taxes for the other 45 states that do have sales taxes.  That doesn't sound very equitable.  Such "retailers" can be individuals.  Perhaps they purvey custom-made quilts sewn to order, which means they might have only one customer at any given time.  And now South Dakota wants to complicate their lives with tax collection.

Over the last few years, there's been a veritable exodus of Americans who leave high-tax states, like California, for states with lower taxes.  The idea that one can't get away from these states is hateful.  That the state one has fled can still impose taxes on him seems un-American.

Each of the states is sovereign, and each of the states can levy sales taxes at whatever rate it wants.  But none of these internet retailers residing in other states had a vote in what those tax rates would be.  One assumes that South Dakota hasn't gotten the message about "no taxation without representation."

The solution to the problem of so-called "lost revenue" due to internet sales is already in the hands of the states; the high court needn't intervene.  The solution is simply to impose a new substitute tax.  Indeed, the states could do away with sales taxes altogether, including for brick-and-mortar outfits.  They might consider upping their income tax rates, or even imposing a capitation.  When it comes to taxation, government can be quite creative.  But the states don't want to change; they want individuals to be required to change.

Except for the payroll tax, sales taxes are just about the only tax a lot of low-income folks pay.  Why not end sales taxes and make up for the lost revenue by expanding the payroll tax?  That would ease the compliance and regulatory burden on all retailers.

Some states pride themselves on not having an income tax.  Such states must get their revenue from somewhere, so they depend on the sales tax.  That's their choice, and that's their problem.  The states also want tourists to visit their states to pay taxes they're afraid of imposing on their own residents.

The primary reason a government levies taxes is to raise revenue to pay for the proper and essential things government does.  Taxation's main purpose is not to regulate behavior, protect enterprises, or punish.  It's not the non-collection of sales taxes from internet retailers that is hurting "physical" brick-and-mortar stores.  Rather, it's the state legislatures that have levied sales taxes on them.

The tax that South Dakota expects others to collect for it is a consumption tax.  Some say that if you want less of something, tax it.  Perhaps South Dakota wants less consumption, fewer sales.  The reason one should be taxed to pay for state government isn't because one has purchased something, but because one is residing in the state and receiving the benefits of the state.

If the states can't be commandeered to carry out federal law, such as immigration laws, how can a state commandeer the residents of other states to carry out its laws and collect taxes for it?  Since e-commerce is worldwide, should other nations be able to commandeer retailers in America to collect taxes for them?  I ask that absurd question because what South Dakota is seeking is absurd.

There are huge constitutional issues at play in this case.  One of them is whether the high court should be imposing taxes, which is a legislative prerogative.  If the Court finds for South Dakota, it will not only be imposing a new tax, but also be creating a whole new tax regime: cross-state taxation.  If that is correct, then in holding for South Dakota, the Court would be "legislating from the bench."  Such judicial legislating, which is usurping the power of another branch of government, should be an impeachable offense.

Recently, Justice Neil Gorsuch disappointed conservatives by voting with the four "liberals" in an immigration case – seems he doesn't think we can repatriate illegal aliens.  In the oral arguments heard in South Dakota v. Wayfair, Inc., Gorsuch doesn't show his hand, so it'll be interesting to see how he votes.  (Gorsuch does, however, use the word "delta" twice, the only iterations of the word in the oral arguments.  Your assignment, should you choose to accept it, is to report back on what that word means in this context.)

Even if the Court does the right thing and finds for Wayfair, Inc., internet retailers still aren't out of the regulatory woods.  Congress weighed in on the issue of internet taxes in 2013, when the Senate passed the Marketplace Fairness Act.  The bill is still pending, as the House hasn't passed it.  The MFA would do exactly what South Dakota is seeking in its suit against Wayfair: allow for cross-state taxation of sales.  In June of 2013, American Thinker ran "Internet Retailing Under the Marketplace Fairness Act" by yours truly, which addressed some of the issues in this misbegotten law.

The internet is one of the most transformative empowering inventions of the last half-century.  In its recent grilling of Facebook's Mark Zuckerberg, Congress showed America how clueless some members are concerning this technology.  Both Congress and the Supreme Court should err on the side of caution when seeking to regulate the net.  Let government show that it can secure its own online systems against hacking before presuming to change our wonderful internet.

Taxing out-of-state internet commerce is a singularly awful idea, especially when the states have so many better options for raising revenue.

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.

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