The Great State Sales Tax Grab

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The Great State Sales Tax Grab

Tax collectors assault out-of-state sellers, as Hamilton feared.

A growing number of state governments have decided to stop following a law merely because one Supreme Court Justice suggested it should be rewritten. Can you imagine if a citizen or business tried to get away with this?

Adding irony to insult is that the jurist who started this wave of taxpayer-funded lawlessness was wrong on the facts. Not that the politicians and bureaucrats lunging for more tax revenue really care.

State governments are increasingly defying the Supreme Court’s 1992 decision in Quill v. North Dakota. That’s when the Court ruled that a business with no physical presence in a state cannot be forced to collect its sales taxes. The issue at the time was the growth of mail-order shopping, with state governments wailing that it was starving them of revenue. Then as now, citizens were still responsible for paying the tax, even if the out-of-state retailer didn’t collect it. Then as now, state claims of poverty were overblown.

But last year Supreme Court Justice Anthony Kennedy fell for this argument, even though he had wisely rejected it in 1992. In a March 2015 opinion addressing a separate issue related to remote sales, Justice Kennedy took the opportunity to opine that the physical presence standard was “now inflicting extreme harm and unfairness on the States.”

Justice Kennedy urged the Court to reconsider Quill, and that’s all the encouragement America’s revenue collectors needed to try plundering electronic commerce. Leading the charge are Alabama and South Dakota, which have launched frontal attacks on Quill by defiantly asserting that the physical presence standard is over. They now claim the power to force tax-collection obligations on out-of-state businesses based on dollar volumes of annual sales into the state.

Tennessee’s revenue department has proposed a similar rule in defiance of existing federal law. Louisiana, Oklahoma and Vermont have claimed the authority to impose new reporting requirements on out-of-state sellers. Colorado has lately been fighting direct marketers in court to enforce a similar law enacted even before Justice Kennedy’s comments. Legislators have introduced bills in various other states that would also defy Supreme Court precedent.

When Justice Kennedy started the outbreak of lawlessness last year, he claimed that the result of the physical presence standard “has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register.”

The Justice should have examined the relevant data. In 1992, the year Quill was decided, state and local governments collected $836 billion in revenue. By 2015 the total had swelled to more than $2.3 trillion. After adjusting for inflation, it works out to a 79% revenue surge for states and localities, roughly triple the increase in population during the period. How many Americans would love to see that kind of “shortfall” in their paychecks?

As internet shopping continues to grow, states are not seeing a revenue disaster. As for the local retailers that Justice Kennedy wants to help, their principal online competitors have a diminishing tax advantage or none at all. As e-commerce behemoth Amazon has expanded, it has acquired a physical presence in an expanding number of jurisdictions and now collects sales taxes in most states. The other giants of online shopping like Wal-Mart, Apple, Home Depot, Best Buy and Macy’s are also online sales tax collectors.

One of the reasons the founders wrote the Constitution—and the reason Quill was correctly decided in 1992—was to prevent state governments from placing suffocating tax and regulatory burdens on interstate commerce. In Federalist 22, Hamilton compared the “interfering and unneighborly regulations of some States” to the commerce-killing taxes levied by German princes on goods passing through their territories.

If states want to reach outside their borders to harass businesses nationwide, they can coax Congress to give them that power. Until then is it too much to ask that government officials obey the existing law?

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