Internet Sales Tax: a proposed solution

image credit: blog.dawog.net

Yesterday Scott French and Elizabeth Slattery at The Daily Signal reported further on the horrible SCOTUS decision to permit sales tax on Internet transactions across state lines. They also suggested a solution. Unfortunately, they identify Congress as the branch of government that can legislate that solution. Here’s the gist of it:

Unfortunately, small businesses will suffer the most from the ruling. [Chief Justice John] Roberts explained:

One vitalizing effect of the Internet has been connecting small, even ‘micro’ businesses to potential buyers across the nation. People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country—but probably not if they have to figure out the tax due on every sale.

Most small businesses are not equipped to handle being subject to every taxing authority in every location where they have a customer. There are more than 10,000 state and local taxing jurisdictions in the country. And these jurisdictions have different tax rates, rules governing tax exemptions, product category definitions, and standards for determining whether an out-of-state seller is subject to sales tax in the first place.

Roberts pointed to a few examples of how confusing state taxes can be:

New Jersey knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters … Texas taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant … Illinois categorizes Twix and Snickers bars—chocolate-and-caramel confections usually displayed side-by-side in the candy aisle—as food and candy, respectively (Twix have flour; Snickers don’t), and taxes them differently.

Further, the cost of compliance is beyond the means of most small businesses. Implementation and integration of software to calculate taxes in all these jurisdictions alone is estimated to cost up to $250,000.

The good news is that, under its authority to regulate interstate commerce, Congress has the power to fix this problem. Congress is the branch of government best able to consider the competing interests at stake, not unelected federal judges.

Congress should codify the physical presence rule to protect small businesses from being subject to mandates from states where they have no physical connection and whose policymakers face no accountability for the tax and regulatory costs that they impose on out-of-state businesses.

If state borders truly do matter, Congress must limit states’ ability to reach beyond their borders to place regulatory burdens on out-of-state businesses.

Sounds feasible on paper. But perhaps so many small businesses will suspend sales that Congress will have to respond to their constituents – for once. We’ll see. (The full report is here.) 

# # #