All this talk about "draining the swamp" has the alligators worried. And some of the most aggressive gators in Washington, D.C., are actually state governments: they're perpetually hungry for more tax revenue to fuel their burgeoning bureaucracies back home.
One juicy morsel they'd like to snap up is a bigger piece of the e-commerce pie. They're asking Congress to pass a law to help them pocket sales taxes on goods their residents buy online from out-of-state businesses.
At first blush, that may sound reasonable. But requiring businesses in one state to collect and remit taxes to another state amounts to regulation without representation. And that's antithetical to the principles of federalism.
Throughout America's history, states have, with very few exceptions, been barred from taxing non-resident individuals or businesses. That goes for property taxes, income taxes and sales taxes. That's the way it should be.
Fans of Internet sales taxes say they don't really violate this principle, because the tax would be levied on in-state residents, not out-of-state businesses. But businesses would be required to do all the work—calculating, charging and forwarding taxes—on behalf of states and local jurisdictions with which they have no connection.
That lack of connection makes turning businesses into unpaid tax collectors for "foreign" states doubly unfair. Retailers benefit from schools, hospitals, fire fighters, law enforcement, roads and other services and facilities provided by their state and local governments. However, an Internet business operating out-of-state uses none of these services and should not be required to fork over taxes to support them.
Many in Congress are now trying to convince the Trump administration that Internet sales taxes will level the playing field between brick-and-mortar retailers and Internet operators. But it won't. There are simply too many other cost variables between states.
State income taxes, property taxes, local and state sales taxes, tax waivers for certain products and businesses—these all vary widely. If Congress lets states impose sales taxes on out-of-state Internet purchases, it will open Pandora's Box. Soon, states will be back demanding portions of out-state business income or other "compensatory" adjustments to make up for revenues "lost" to out-of-state Internet businesses.
Perhaps the best reason for not letting state and local tax authorities impose a complex patchwork of Internet sales taxes is that it would make it virtually impossible for small Internet entrepreneurs to start up and grow.
There are more than 10,000 sales tax jurisdictions in the U.S. To comply with all of their tax requirements, every Internet retailer would have to spend thousands of dollars to buy and constantly update a computer program that keeps the sales tax amounts current in all jurisdictions.
And they would still face an accounting nightmare: collecting and remitting sales taxes to the proper jurisdictions—hundreds, if not thousands of them—repeatedly throughout the year. Any glitch or slip-up, and they would be liable to any jurisdiction that decides to audit their accounts.
Acknowledging this unworkable complexity, some Internet sales tax advocates have proposed a compromise: letting businesses collect Internet sales taxes based on rules set by their own states. That would reduce complexity, but would still require taxes to be collected — even in states that have no sales taxes and even in states that don't want to force Internet merchants to collect taxes for others.
It's not as though states derive no revenue from interstate sales. Most large Internet retailers already collect these taxes because they have physical locations in every state.
But an Internet sales tax would be financially fatal for many home-based businesses. It would also violate the principles of federalism and the rights of people to be taxed only where they can vote for their representatives.
Congress has many things it needs to do. Feeding the gators is not one of them
This piece originally appeared in the Washington Examiner