Balance sheet
Balance sheet ChristianChan/Getty Images/iStockphoto

States Are Secretly Trying to Tax Your Online Purchases

Jun 22, 2017

States and localities currently cannot tax online purchases made from companies outside their own borders. Yet over the past two decades, state and local tax officials have been lobbying Congress—unsuccessfully—to change this.

The introduction in the House last week of the No Regulation Without Representation Act seeks to shut down this effort and prevent states and localities from taxing their residents’ online purchases. This bill, if enacted, will preserve healthy competition among states to the benefit of individual citizens.

Under the 1992 Quill Corp. v. North Dakota Supreme Court decision, states may not collect sales tax from companies with no physical presence within that state’s borders. For example, if a Virginia resident goes online to buy a product from a California retailer, Virginia cannot force that seller to calculate, collect, and remit sales tax unless it has a physical “nexus” (defined as a store, warehouse, or office) in the state.

Companies’ ability to relocate forces states to compete to attract tax-paying businesses. This in turn disciplines states’ taxing, regulating, and spending behaviors, hopefully decreasing them.

It’s precisely this ability to opt out that many state tax authorities have been asking Congress to eliminate for online retailers. Over two decades, this effort has shifted from trying to impose an interstate tax cartel to legislation that would empower states to force out-of-state sellers to collect and remit sales taxes.

These measures have found support from big box retailers, who see an opportunity to crush smaller competitors with crippling compliance costs, and from tax-calculating software manufacturers seeking a ready-made market for their products. For small online sellers, however, this would mean having to calculate and collect sales taxes for the country’s nearly 10,000 taxing jurisdictions—each with its own bases, rates, exceptions, and tax holidays.

A 2013 Gallup poll shows the general public opposed to these tax expansion plans. So having spent considerable time, money, and effort in trying to convince Congress to bless their sales tax cartel to no avail, many states are now trying to reach across their borders and export their tax and regulatory regimes without Congress’s permission. Over a dozen states have passed, or have considered, laws that either obligate out-of-state businesses to report sales or expand the definition of “nexus” in order to trigger sales tax collection obligations on many online business arrangements.

Online commerce has given every consumer the same benefits that citizens living near physical borders long have enjoyed. In a sense, popping across the state line for cheaper gas or a lower sales tax rate has gone viral. Citizen-consumers can now “vote with their feet” while shopping online. Predictably, state tax officials have reacted by attempting to thwart competition from other tax jurisdictions by eliminating the consumer’s exit option.

The No Regulation Without Representation Act would put a stop to this. It would prevent states from imposing tax or regulatory obligations on businesses that lack a physical presence in that state. It also limits the definition of what qualifies as a tax-triggering physical presence to the long-established standards.

The U.S. Constitution entrusts Congress to preserve healthy competition among the states—and to prevent states colluding to undermine it. The No Regulation Without Representation Act takes that charge seriously. By reinforcing a competitive federalism, it would benefit all Americans.

Jessica Melugin is an adjunct fellow at the Competitive Enterprise Institute.

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