Friday, July 03, 2009

The Internet Tax

I see that the LA Times is really, really upset about the lack of enthusiasm exhibited by Internet retailers when it comes to collecting sales or use tax. Their opinion piece for July 3rd makes the claim that the State of California is owed about a billion in spare change. It's an interesting claim in a recession, that people should pay an extra 9.5% in California for everything they buy from out of state retailers. What for? It's called the use tax. Everything you use is subject to the use tax.

The use tax and the sales tax are nearly synonymous. The sales tax is something you're already very familiar with - it's what you pay when you buy something at at brick and mortar store, like Target or Sears. The use tax is the same thing, except that you are required to pay it directly to the state when it's required to be paid. Instead of the retailer computing, collecting and paying it to the state, you do it. You usually pay the use tax when you buy something from out of state. At least, that's what the Times is saying people are required to do, but they don't.

The article points out that since about 1992, The Quill ruling from the U.S. Supreme Court has been a roadblock to the collection of sales or use taxes on Internet and out of state sales. Quill, Inc. is a corporation based in Delaware that was conducting interstate commerce with the people in the state of North Dakota. The state of North Dakota determined that Quill should have collected use taxes on the merchandise sold in that state. Quill refused, so the state of North Dakota sued.

In that case, the court rejected the notion that states could collect taxes on interstate commerce for a variety of reasons. Not just sales or use tax, they excluded *any* tax in their language. The decision runs through a number of issues relating to the due process and commerce clause of the Constitution. The ruling can be summarized as simply saying that Congress has exclusive power to regulate commerce among the states, and that no matter how the court thinks about it, they must defer to Congress.

I've seen discussion of state taxation of Internet sales since I've started using the Internet in 1994. Every few years or so since then, there has been grand talk of a unified tax code that all states can use to tax Internet sales. But it never happens. They need unification so that there can be no discrimination between in-state sales and interstate sales, as required by numerous court rulings and the Constitution. This is important because the framers of the Constitution recognized that if the states started charging tax on commerce between them, trade wars would emerge.

Even in the LA Times opinion piece, they discuss the California Board of Equalization. Why does the BOE even exist? The agency exists because the various counties within the state collect tax at different rates. They "equalize" the tax by collecting all of the sales tax due to the state from all of the counties and redistribute that tax among all the counties. Even the state of California has some concern for economic stability by regulating commerce among their counties. Apparently, some editors fail to see the need for equalization on a national level.

The Supreme Court also recognized that unless there was a physical nexus, and a minimal contact between the taxing state and the retail business, that the state couldn't impose a tax on commerce with another state. Just because the product is available through a mail order catalog, or a common carrier (the phone company or US Mail, and nowadays, the Internet), doesn't make it subject to a state's power of taxation. The reason for this is that taxation of this kind could become an undue burden on interstate commerce. This is also important in a recession, as we were in 1992. Take note that the lack of taxes on interstate commerce is what makes our economic system so strong as a union of states.

The Times article has noted a trend among the states, that several states are advancing their efforts to find some way to tax Internet sales. As if taxing more would fix their problem. The Times noted that Amazon has terminated affiliations with New York to remove their physical presence from that state so as to avoid in personam jurisdiction for sales tax liability. has terminated affiliations with 4 states, including California, to avoid being required to collect the sales/use tax, as well. They are terminating these affiliations even before a law is passed. This push for Internet tax legislation is disruptive to the economy and will only alienate the various state governments from their constituencies. And since only a few states at this time are bold enough to do it, a trade war among the states could ensue.

Some people have noticed that the State of California, like many other states, is in a constant battle regarding their budget, since there never seems to be enough money. Their budget dramas have been relatively constant since the late 70's, save for the rise in property tax revenue during the real estate bubble and the collapse of it. Notice that the bubble states were happy, sated and silent during the bubble. Now they want more money. I dare say that more money is not the solution to their problem. And imposing this tax, the use tax, in the manner that they seek to do, will only damage their economy further. They are again, attempting to circumvent the commerce clause of the US Constitution.

Even if all the states were to get their act together now, and come up with a uniform plan of taxation of interstate sales, I doubt very much that Congress would cede that jurisdiction to them anytime soon, if at all. This would create another level of bureaucracy, killing hundreds of trees in the process, and contribute to global warming.

This union of states has been together now for well over 200 years, and in all that time, the states could never cooperate enough, or have incentive enough, to put together a consistent plan of interstate taxation. If they haven't done it by now, I can't see it happening in the near future. I also find the timing of the LA Times article rather ironic. They are calling for more taxation a day before Independence Day, the American Revolution, with taxation without representation being one of the motives for declaring independence. As if we don't already have enough taxation.

Get over it, California, and any other state daring to traverse this path alone. Imposing taxes on Internet commerce may not be the answer, and could even become a problem. It's not going to happen in time to fix your budget, maybe not even in our lifetimes. So relax and find some other tax to collect.