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January 10, 2019

New Congress Must Solve the Internet Sales Tax Problem

 

Despite the amicus pleadings of the Institute for Policy Innovation and many other policy and business groups, with its 2018 Wayfair decision the Supreme Court overturned its own decades-old Quill precedent, which limited states’ ability to impose sales taxes on internet transactions. That decision has left ecommerce in no man’s land, with little protection for consumers and businesses selling over the Internet.

Under the Quill precedent, states were only permitted to demand that sales taxes be remitted on transactions where the seller has a physical presence in the purchaser’s state. This “physical presence standard” was necessary as a basic limitation on a state’s power to tax across its own borders—something not only common-sense but also American history and constitutional precedent demand.

Without limitations on a state’s ability to assess taxes outside its own borders, we could see the “no taxation without representation” problem in overdrive. After all, wouldn’t South Dakota just love the power to tax people who don’t vote in South Dakota? Especially since there aren’t that many people who live in South Dakota in the first place.

That’s why South Dakota challenged the Quill precedent, and the Supreme Court agreed.

We argued against overturning Quill, but one can understand at least part of the Court’s thinking: The Court essentially created a standard in 1992 with the Quill decision, but Congress, not the courts, is supposed to be making tax law. So the Court undid its own legislating.

But now there’s nothing stopping states from doing pretty much whatever they want on internet sales taxes, which suggests the federal government has a Commerce Clause obligation to prevent, say, two states from trying to tax the same transaction. Even worse, now every internet seller could be subject to audits from dozens of states. Imagine a minor independent internet seller getting audit notices in the mail from 20 or 30 states, and having to either pay up or lawyer up. This will be an inordinate burden on ecommerce, and could drive many small internet sellers out of business.

Congress needs to create a clear standard that defines physical presence and other key terms, and protects small and modest-sized sellers from the burdens of onerous multi-state audits. Ohio Congressman Steve Chabot has introduced one such proposal, and there will be others.

There’s nothing partisan about fixing the internet sales tax problem. Congress can fight about other things, but this is one problem that should be fixed as soon as possible.


 

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