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August 10, 2016

No Regulation Without Representation

 

In mid-July, Congressman Jim Sensenbrenner unexpectedly introduced the “No Regulation Without Representation Act of 2016,” a proposal that would codify the physical presence, or “nexus,” requirement established by the U.S. Supreme Court’s Quill decision.   

The Supreme Court reaffirmed in Quill Corp. vs. North Dakota (1992), after National Bellas Hess vs. Department of Revenue (1967), that a company (in Quill, a mail order company) must have something more than a minimal physical presence in a state. That means having a store or shipping center or even a team of salespeople in the state 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 and complying with the red tape in multiple jurisdictions was unfair and too complicated if the retailer did not have a real physical presence. Without Quill, states would expand government taxing power, limit retail competition, and hamper the growth of smaller retailers by increasing the regulatory barrier to entry. 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 were too complex for remote sellers and thus barriers to interstate commerce. 

Today e-commerce follows that same Supreme Court ruling. So businesses are not obligated to collect a state’s sales tax, unless that business has a substantial presence in the buyer’s state. However, the taxes have always been due and payable by the purchaser to the state where he or she lives, known as a use tax.  

Mr. Sensenbrenner’s bill defines physical presence and helps stop the ongoing attempts to ignore the Quill decision.  

The issue of physical presence nexus is perhaps the most important issue of the Internet age as it limits government power from spreading beyond the physical borders of a government entity. To choose economic nexus (instead of physical nexus) would be to grant borderless power to government, taxing businesses anywhere. 

A government empowered to tax those without any physical connection to the state would then have the option of auditing 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 written, in part, as a solution for this exact problem, which developed under the Articles of Confederation—states looting across state lines, taxing without representation. This led to the need for something better, including the Commerce Clause as a means to keep overly aggressive states from imposing barriers to trade on other states and their citizens.  These concerns are still as valid today as they were in 1789. 

Many companies that already have physical nexus in all states favor changes that would disadvantage small businesses and online commerce. They are merely “rent seeking,” seeking benefits in the political arena, lobbying for a huge competitive and economic advantage.  

Their apparent fear of competition in the marketplace leads them to work for a twisted public policy that would result in the expansion of state power and would be a poor tax precedent. Fortunately for consumers and citizens there are now proposals on Capitol Hill to end such destructive action.


 

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