Bridge Span 18-5: State Tax Authority as Big as the Internet

Given the volume of whining and complaining by state tax collectors one would think that they face a real crisis in collecting online taxes. In fact, they do not. And given their proposed solution one would think that they are out to end small business and crush the Constitution if that is what it takes to get their way. In fact, that is exactly what they are proposing.

Several states, led by South Dakota, undertook a scheme to overturn current law, intentionally passing unconstitutional laws to bait the Supreme Court into acting. What the tax collectors want is to have no restraints on how far they can reach into states across the country and into anyone’s pocket whether or not they are actually in the state. In South Dakota v. Wayfair, heard by the Court this week, the Court was asked to determine whether in fact there are limits on state taxing authority or whether state authority to tax and enforce is as deep and broad as the internet. The trade of a sliver of revenue for expanded taxing authority is a bad deal.

Online purchases total less than all retail sales and only very small fraction goes without being taxed already, especially as 17 of the 18 largest online retailers already collect the taxes for the state tax collectors. Given that the states already have the authority to collect 100% of the tax, where they do not is only a problem because the states do not want to collect it themselves.

As the public is well aware, this is merely a ploy by state tax collectors and their fans to gain new tax revenue via an expanded definition of what tax is due. A March National Taxpayers Union poll makes that abundantly clear. By enormous margins people believe that the internet is best when it is as free as possible of taxes and regulations generally. Specifically, nearly two thirds oppose taxes being imposed on them by states where they are not. Three-quarters understand that such taxes are a reversal of the benefits of tax reform and that such actions will hurt small business. Big retailers will be able to absorb the blow of a massive new compliance burden of being made the tax collectors for every taxing entity, nearly 12,000 nationwide, while small businesses will be put out of business.

But, the troubles even run deeper than big business eliminating competition via regulation. The issue of physical presence nexus is perhaps the most important issue of the internet age as it provides a limit to government power — preventing the power of government from spreading beyond the physical borders of a government’s jurisdiction, such as the state lines. A government empowered to tax those without any real, physical connection to the state then can also collect tax from, and audit, the same.

This would be particularly troubling for small business, often having a limited physical presence in only one or two states but subjected to tax collection and audits of every jurisdiction. Deprived of their standing, small businesses lose the protection of due process. Making sure states do not erect such barriers to discourage interstate commerce is precisely the active obligation placed upon the federal government by the Commerce Clause. The U.S. Constitution was partially written in response to, and as a solution for, this exact problem which developed under the Articles of Confederation.
States saw few limits to their power and began looting across the state lines. Taxation without representation. As a people we had been there before. So, something better was needed and a new Constitution was written, including the Commerce Clause, as a means to keep overly aggressive states from imposing barriers to trade on other states and the citizen of those other states. But we are now on a course to go back to that time, where citizens of one state will be at the mercy of 12,000 tax collectors from across the country.

Tax collectors, at the behest of politicians, rally to the cry “Don’t tax you, don’t tax me, tax that fellow behind the tree!” Taxing those they do not represent is an easy way to avoid scrutiny, but as history has shown, that scheme is also a proven way to lose our Constitution.

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