Why a National Internet Sales Tax Is a Really Bad Idea

online shopping
online shopping
Photograph by John Lamb—Getty Images

When politicians call for “fairness,” it’s important to take a closer look at their definition of fair. See, for example, the nationwide push in state capitols to slap online sales taxes on out-of-state retailers—a simple tax grab disguised as a matter of high-minded principle.

Legislators in at least a dozen states are currently trying to pass such bills. This effort is being organized by the National Conference of State Legislatures, which has made the enactment of online sales taxes—so-called “E-Fairness legislation”—one of its top priorities. The group claims this would ensure that online and brick-and-mortar retailers play by the same tax rules. But it would do nothing of the sort.

Currently, states are constitutionally prohibited from collecting sales taxes from retailers that have no presence within their borders. That’s thanks to the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota, in which a unanimous Court held that a business must have a “substantial nexus” in a state in order for it to levy state and local sales taxes.

This swiftly dashed state legislators’ dreams of increasing revenue by taxing businesses beyond their own borders. Their frustration has only grown with the proliferation of online shopping, which has opened up a new frontier largely beyond the tax collector’s grasp.

But hope springs eternal, and state lawmakers are now trying a second time. Justice Anthony Kennedy opened the door last March to reversing his vote in Quill Corp., inspiring the proposals now under consideration in statehouses across the country.

If they pass, affected businesses are all but guaranteed to sue in federal court. Alabama’s deputy revenue commissioner, Joe Garrett, frankly admitted this to the Wall Street Journal: “We’re confident that some remote sellers will not comply and therefore it will lead to litigation… We have been very open about what we’re doing.” In other words, officials want the Supreme Court to intervene and review its 1992 decision if different lower courts reach differing conclusions.

Even if that doesn’t work, the would-be tax-hikers have a backup plan. The Supreme Court argued in Quill that Congress could render this issue moot by passing a national sales-tax framework. Justice Stevens wrote for the Court: “Congress is now free to decide whether, when, and to what extent” states could burden out-of-state sellers with taxes.


If the Supreme Court stays silent on this issue, state legislators and governors hope to force Congress to act. That’s why they’re trying to pass a wide variety of competing and contradictory laws. Utah State Senator Curt Bramble, the president of the National Conference of State Legislatures, told The Salt Lake Tribune in January that this patchwork approach may spur Congress to pass a national online sales-tax scheme.

Consider some of the state proposals. Some, such as Louisiana’s and South Dakota’s, force out-of-state retailers that pass certain sales thresholds within their states to collect sales taxes from local buyers. Colorado forces online retailers to hand over a list of in-state customers, who are then notified by local tax authorities.

Utah’s proposal is among the worst. It would unilaterally redefine “in-state sellers” to include out-of-state business that ship products via third-party vendors, such as FedEx or UPS. The moment those vendors enter the state, the original seller would be classified as a Utah company, and would thus owe sales taxes on purchases by state residents.

These and other proposals are now winding their way through state legislatures. Some have already passed. As others do, they will undoubtedly cause nationwide economic disruptions, as businesses try to identify and comply with the relevant laws. Apparently that’s a small price to pay for the state lawmakers who hope to benefit from the resulting revenue windfall.

Yet even if they get their way, the fundamental premise behind this campaign—fairness—doesn’t hold up. Any national online sales-tax system will burden online retailers to a degree never felt by brick-and-mortar businesses. Local businesses only have to deal with a limited number of sales taxes—usually only the state, county, and local levies that apply to specific stores. Online retailers, on the other hand, would have to calculate and apply sales taxes across the entire nation—and roughly 10,000 jurisdictions have such taxes.

Complying with this convoluted system would necessarily raise costs for consumers and stifle competition. While software exists to help ease this burden, the trade association True Simplification of Taxation estimates it will cost businesses between $80,000 and $290,000 to implement, with further annual maintenance costs of between $57,500 and $260,000. That’s a pittance for major online retailers, but a fortune for smaller companies and startups.

The problems may be even worse if states pass their respective bills and neither Congress nor the Supreme Court take the bait. Online retailers would then be forced to deal with differing state sales-tax systems, which would be even more unfair than a national mandate. Some companies—especially smaller firms—may even stop selling in states where the burdens are worst.

Where’s the fairness in any of this? The evidence indicates that a level playing field won’t follow on the heels of these state proposals—just the opposite. No matter what state they live in, Americans everywhere should recognize this coordinated campaign for what it truly is: a thinly veiled attempt by politicians to dig even deeper into their constituents’ pockets.

Christine Harbin is director of federal affairs and strategic initiatives at Americans for Prosperity.

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