States Clamoring to Tax E-Commerce (Again!)

As state budgets dwindle, due in part to the nation’s lingering economic slump, governors around the country are once again chomping at the bit to fill state coffers with tax money collected from e-commerce. However, they argue it’s a difficult task; one they hope Congress might make a little easier -- and more popular -- for them.

Last year, the states waged a full-scale battle in Congress to allow them to shift their sales and use tax collection duties onto out-of-state businesses -- something currently prohibited without Congressional approval by the U.S. Supreme Court’s Quill decision. (Read: "Simplification" Is Not the Easy Answer) The states failed to tie the controversial issue to an extension of the Internet tax moratorium that temporarily lapsed last October. In November, Congress passed a clean two-year extension of the moratorium, which is set to expire November 1, 2003.

Having failed last year, and seeking to take advantage of the moratorium’s expiration next year, states are re-energizing efforts to seek Congressional approval to shift their tax collection burden. In order to encourage Congress to grant such authority, state legislatures across the country are passing model legislation that enters them into a multi-state compact known as the Streamlined Sales Tax Project (SSTP). The model legislation enables them to negotiate "simplified and streamlined" sales and use tax laws that are consistent with other participating states in the compact.

West Virginia, Ohio, Washington, Virginia and South Dakota are the latest states to pass legislation permitting them to participate in the compact. This brings to 27 (and the District of Columbia) the total number of states participating in the SSTP. Nine other states, including South Carolina, are considering the legislation.

Together, these states are claiming hundreds of millions of dollars in lost tax revenue to online sales from merchants outside their taxing jurisdictions. Authorities in these states, led by the National Governors Association (NGA) and their friends on Capitol Hill, continue to incorrectly portray the Internet and e-commerce as tax-free havens that are eroding state tax bases.

Nothing can be further from the truth.

Forty-six states have use tax laws on their books, most of which date back to the early 1900s. Currently, the burden falls on the individual states to collect such taxes from their citizens. However, due to the politically unpopular nature of use taxes, most states choose not to enforce collection. Instead, as Internet commerce evolves, states want private enterprise outside their taxing jurisdictions to do their dirty work for them.

The Center for Individual Freedom played a critical role in securing a clean two-year extension of the Internet tax moratorium last year. We strongly opposed the states’ SSTP plan, as we believe it violates the founding principle of federalism and the Constitution’s Commerce Clause. As envisioned by our Founders, states currently compete for businesses and citizens to reside within their borders. They do so by offering competitive tax rates and incentives. The SSTP would eliminate such tax-rate competition. The burden of collecting use taxes should be the responsibility of individual state governments, not free enterprise.

Internet commerce makes up less than one percent of all retail sales in this country. However the benefits that it brings (i.e. jobs, increased tax bases, convenience) would be stifled if Congress approves the SSTP. We stand ready to do battle once again to ensure that doesn’t happen.

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