The Internet Taxes that Could Be Coming

Mike Brownfield

April 12, 2012

If you’ve ever bought anything on the Internet, over the phone, or from a catalog, you might have noticed that when you buy from some stores, you don’t pay any state sales tax, but if you buy from other stores, you do. That’s because a Supreme Court decision protected out-of-state businesses from revenue-hungry states. But a new bill working its way through Congress would change all that, turning every online retailer into a sales tax collector. And that’s legislation Congress should reject. Back in 1992, the Supreme Court ruled in Quill Corporation v. North Dakota that a state cannot force a retailer who doesn’t have any physical presence in that state to collect sales taxes from Internet, phone or catalog sales. So if you ordered a book online from BarnesandNoble.com and there’s a Barnes and Noble store right down the street from your house, you’d have to pay sales tax. But if you ordered that book online from a mom and pop bookstore with one location halfway across the country, they wouldn’t have to collect sales tax from you.

In the Quill case, North Dakota tried to force out-of-state retailers to collect sales taxes and remit them to North Dakota, even if they didn’t have a physical presence in the state. Quill Corporation, which sells office supplies and is based in Delaware, had offices and warehouses in Illinois, California and Georgia, but didn’t have any bricks, mortar, employees, or sales representatives in North Dakota. It did, however, have 3,000 customers there and $1 million in annual sales, so North Dakota wanted Quill to collect tax on those sales.

The Court decided that North Dakota’s law was not permissible because the Constitution’s Commerce Clause protects against a state’s unreasonable burden on interstate commerce, unless Congress otherwise writes a law changing the rules. Since that decision, consumers, businesses and the free market have been protected from laws like the one North Dakota tried to impose, but now Congress is considering a law (S. 1832) that would overturn the Court’s decision and allow states to flip the switch on Internet taxation.

In a new paper, David S. Addington, Heritage’s Vice President for Domestic and Economic Policy, explains why Congress should not change the rules on Internet and mail-order sales:

In the long run, the national economy as a whole benefits from allowing consumers to choose freely what they wish to buy, of whatever quality they wish, at whatever prices they choose to pay, and from whatever seller they wish, whether in the same state as the consumer or not.

Intervention by the federal government and the states in the consumers’ choices by enactment and implementation of S. 1832 would increase the revenues of states, but hobbling out-of-state businesses that sell through the Internet or mail order catalogs does not help the national economy.

Addington writes that it’s not surprising that states want a new source of revenue. After all, they’re struggling with their bloated budgets in this weak economy. But overriding the Quill decision would only give states an incentive to increase taxes instead of cutting the size, scope, and cost of government. And it would be consumers and businesses that pay the price.

There are business groups, too, who are lobbying for the law, arguing that it would protect “Main Street” retailers and “bricks and mortar” stores that are supposedly at a disadvantage. But, as Addington writes, “They seek enactment of S. 1832 so that states can prefer in-state businesses over out-of-state businesses in the kind of anti-competitive economic discrimination the U.S. Constitution was in part adopted to prevent.” What’s more, every sale of goods involves at least one physical facility located in one state or another, which means that those businesses already can be taxed by at least one state. In short, no one is “untaxable.”

At a time when the U.S. economy is struggling to get back on its feet, Congress should not enact a law that interferes with the independent decisions of millions of consumers in the free marketplace and overturns the settled expectations of businesses that have made market decisions under the current rules for two decades. And it shouldn’t give state governments a reason to take more money from taxpayers instead of getting their spending under control.

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