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August 23, 2013

Let's Play: Who's the Constitutionalist?

 

A self-proclaimed Tea Party member, Mayor pro tem David Hagan of Victoria, Texas, is trying to pressure Congressman Blake Farenthold into supporting the so-called Marketplace Fairness Act, which would radically expand the power of government, harming Texas small businesses along the way.

But Mr. Hagan is wrong about virtually every point he raises, and in addition he completely misses the big picture.

In National Bellas Hess vs. Department of Revenue (1967) and reaffirmed in Quill Corp. vs. North Dakota (1992), the U.S. Supreme Court required that a company (in this case a mail order company) must have more than a minimal (de minimis) physical presence in a state, usually a store or shipping center or even a team of salespeople, before that merchant can be required to collect that state’s sales taxes. The Quill standard was crafted because the court found that collecting sales taxes in multiple jurisdictions in several states was too complicated, and unfair, if the retailer did not have a real physical presence. Without this physical nexus standard, states would be able to tax citizens of other states, and those citizens would have no democratic (electoral) recourse. In addition, the Court found the state tax schemes too complex for remote sellers and thus barriers to interstate commerce.

So ordering from a catalogue, when the merchant had no physical presence in the state, has never triggered an obligation to collect taxes (however, the taxes have always been due and payable by the purchaser). Today e-commerce follows that same rule.

Supporting the legislation that Mr. Hagan calls for would allow states, for the first time, to tax those without any real, physical connection to the state. In turn, the state would then have the option of collecting tax from, and auditing, those who have no physical presence in that state. So, bottom line, the state of California would begin enforcing its tax laws on Texas businesses.

Therein lies the problem and it is particularly troubling for small businesses, since small businesses likely only have physical presence in one state, maybe two, but yet would be subjected to tax collection and audits from every tax jurisdiction.

One wonders why a self-proclaimed Tea Party member would want the federal government to empower California and New York to start taxing Texans. Perhaps a refresher course on “no taxation without representation” is in order?


 

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