IS NOT THE EASY ANSWER
for Individual Freedom
Renee Giachino, General Counsel
Jeffrey Mazzella, Vice President,
United States has long been considered the leader of the free-world
and free-market. Over the past decade, the Internet has been a driving
force in our prospering economy, despite temporary setbacks. Our
countrys relative economic strength in technology areas is
due, in part, to the political establishments recognition
that the Internet and electronic commerce should be free from legislative
and regulatory roadblocks that could impede its evolution.
in recognizing the Internets susceptibility to creative tax
schemes and the need to protect this new engine of prosperity, adopted
the Internet Tax Freedom Act (ITFA) in October of 1998. It imposed
a three-year moratorium on multiple, discriminatory and access taxes
on the Internet.
moratorium is set to expire in October, and the debate over its
extension is being clouded by a coalition of states that fear an
eroded tax base, as more consumers shop online. Some of these states
are in the process of enacting model legislation that includes a
"simplified and streamlined" sales tax system with the
hopes of getting congressional approval to force remote merchants
to collect and remit sales taxes on purchases made by their citizens.
1992, the Supreme Court ruled in Quill Corp. v. North Dakota
that states, without permission from Congress, cannot require out-of-state
retailers to collect and remit sales taxes unless the retailer has
a substantial physical presence or "nexus" in the state.
coalition of states, together with traditional brick-and-mortar
retailers who oppose the online competition, are lobbying Congress
to accept the states "simplification" plan known
as the Streamlined Sales Tax Project. In exchange, the states want
permission to reach outside of their taxing jurisdictions, shifting
the states tax collection burden to remote vendors. But the
"simplifications" as recommended by the Streamlined Sales
Tax Project, which include a minimum of ten categories addressing,
for example, uniform rules, definitions, formats and audit procedures,
are anything but simple.
the proposed "simplification" scheme contradicts the economic
structure that has made our nation a global leader. Contrary to
the view of one of our Founding Fathers, Alexander Hamilton, who
noted in the Federalist No. 32 that the Constitution did not grant
Congress the authority to regulate state tax policies except with
regard to exports and imports, it has long been recognized that
Congress has the authority, under the Commerce Clause, to regulate
state taxation of interstate activities. But the primary evil that
the Commerce Clause sought to remedy was attempts by states to export
their tax burdens to residents of other states. Because local residents
and brick-and-mortar entities benefit from state and local services
and infrastructure such as police and fire protection, roads and
waste collection, it is appropriate for them, and only them, to
bear the tax burdens that finance such services. Based on this premise,
out-of state entities should not be forced to take on the states
responsibility and collect their taxes for them.
current state tax systems are not adequate for the new economy,
or if such systems disadvantage local retailers, states already
have it within their power to collect taxes from their citizens
for remote online purchases. The failure of the states to collect
sales and use taxes from their citizens on such purchases is simply
that the failure of the states. But it should not be the
role of Congress to provide a mechanism for states to shift their
tax collection burden to out-of-state retailers. Contrarily, Congress
role should be to ensure the states do not unfairly export this
burden, thereby obstructing interstate commerce.
the financial burden on remote businesses to collect and remit states
sales and use taxes would ultimately result in a de facto tax increase
on the consumer. As with any government mandate, especially when
dealing with tax schemes, the added costs of doing business is ultimately
passed on to consumers by way of increased prices.
currently are more than 7,500 taxing jurisdictions in this country
all with different, complicated rules and structures. The
proposed "simplification" does not go far enough in significantly
reducing or simplifying these rules and structures to the point
where businesses would not have to endure a considerable financial
ironically the states proposed method of "simplification"
could reasonably be considered a violation of state sovereignty.
Our countrys historical framework of "no taxation without
representation" led to a system of taxation that has traditionally
required state legislatures to develop tax policies within their
own borders. As a result, states tax and regulatory policies
employ fiscal incentives such as tax abatements and subsidies in
attempting to induce non-resident firms and businesses to locate
within their jurisdictions or to keep resident businesses from moving
elsewhere. Congressionally approved collusion between rival states
would essentially eliminate such competition, thereby threatening
our system of state sovereignty. Such lack of fiscal competition
between the states would ultimately have a negative impact on consumers
and our nations businesses. Each state needs to be able to
deal with its financial needs as it best sees fit.
simplification plan no doubt will come with conditions, such as
those suggested in the 106th Congress, that allow only
those states signing a compact to collect taxes on Internet commerce.
This infringement on state sovereignty does not allow states or
localities to give preferences to certain industries or goods or
to adapt to their own particular circumstances. Congress should
be cautioned against unfettered tampering with state and local fiscal
any "simplification" program or tax collection compact
between the states could conceivably require maintenance and oversight
by a third party, potentially even the federal government through
one of its agencies. The formation of any new bureaucracy overseen
by the federal government would further threaten state sovereignty.
if one assumes that legislation calling for simplification would
be constitutional, this approach has other pitfalls. Through growth
of the Internet, expansion of e-commerce results in greater consumer
options through interstate and foreign trade. Excessive regulation
and taxation that may result from simplification could threaten
the United States superior fiscal position, as it could send
more people to overseas vendors, ultimately exacerbating trade imbalances,
as consumers in significant numbers learn to exploit currency fluctuations
and direct purchase of gray market goods.
of the Internet will be fatal to its continued growth. As evidenced
by recent court rulings in France, Germany and Italy banning content
from their borders, attempts to regulate the Internet can cause
national and international conflict and criticism. Individual attempts
by states and countries to place burdensome restrictions on the
free flow of trade over the Internet should be avoided in favor
of unfettered growth of the many borderless opportunities and advantages
that e-commerce provides.
the implication "simplification" would have on consumer
privacy is an open question. Apart from any records that an Internet
it has adopted, electronic commerce permits an Internet purchaser
to maintain a level of anonymity from "big-brother" watching
his or her purchasing practices. With few exceptions, the government
cannot obtain vendor records without following appropriate search
warrant procedures designed to protect the purchasers fundamental
right to privacy. With simplification, however, the audit procedures
proffered threaten consumer privacy. The access to personal data
that may result through audit procedures leaves consumers vulnerable
to misuses of sensitive information and potentially violates consumers
constitutional rights of privacy and due process. Although some
proposals, such as the Internet Tax Moratorium and Equity Act (S.
512), sponsored by Senator Byron Dorgan (D-North Dakota), make passing
reference to the need for appropriate protections for consumer privacy,
no simplification proposal significantly addresses the issue. Simplification
should not be included in any bill unless and until all potential
threats to privacy and constitutional rights have been addressed.
final and significant point is that Congress simply should reaffirm
the Supreme Court Quill ruling governing states collection
of sales taxes by adopting a national, uniform nexus standard, as
outlined in the New Economy Tax Fairness Act or NET FAIR (S. 664),
sponsored by Senator Judd Gregg (R-New Hampshire). NET FAIR establishes
a bright-line uniform jurisdictional standard for taxing electronic
commerce based on the substantial physical presence or "nexus"
test that would secure traditional principles of tax fairness, reinforce
rate competition among the states and preserve the states
authority to set their own tax policies on commerce within their
can, and should, pass legislation that extends the current moratorium
on multiple and discriminatory taxation on electronic commerce and
make permanent the Internet access moratorium. As language often
defines political battles, and in some cases wins them, the term
"simplification" is anything but "simple." Congress
should not include simplification provisions in the law.
Center for Individual Freedom is a non-partisan, non-profit organization
with the mission to focus attention on individual freedoms and individual
rights guaranteed by the U.S. Constitution. As free-market advocates,
we oppose over-burdensome state and federal regulations and taxing
regimes that will impede the evolution of electronic commerce.
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