Cobb: Internet Taxes Hurt Business

Posted August 4, 2011 at 3:45pm

The largest state revenue decline in decades combined with a reluctance to restrain spending has state policymakers salivating over any new opportunity to raise tax revenue. Their newest strategy: lobbying federal lawmakers to facilitate taxes on the Internet.

To be sure, state taxes are already abusing the Internet and tech economy. Taxes on cell phone and wireless services average over 16 percent. Wireless taxes exceed the general sales tax in all but three states, treating cell phones like cigarettes purely to raise revenue.

At the same time, state tax administrators are bypassing elected lawmakers to tax downloaded products by bureaucratic fiat, and in ways where the same digital good could potentially be taxed multiple times by multiple states as it travels across the Web.

Congress does have authority over interstate commerce, and that authority should be used to protect the borderless Internet ecosphere from discriminatory state taxation. This is the spirit that has repeatedly guided the Internet Tax Freedom Act’s extension to easy passage. It’s also the goal of the Digital Goods and Services Tax Fairness Act and the Wireless Tax Fairness Act that would each set standards to freeze and prevent further discriminatory state taxation.

However, Congress’ authority should not be used to enable new and excessive state taxes. The Main Street Fairness Act would authorize a cartel of tax administrators to begin reaching across state borders for more revenue. It would expressly permit — for the first time — states to force non-voting, out-of-state individuals and businesses to collect and remit taxes on Internet and cross-border sales.

Ask an Internet tax proponent and they’ll couch their ambitions by claiming they merely want to close a “tax loophole.”

The Commerce Clause of the Constitution is not a “tax loophole,” and those that trumpet false rhetoric with the goal of filling state coffers need only look to the Supreme Court for verification. In Quill v. North Dakota, the high court ruled that a business must have a physical presence in a state to be forced to collect taxes, lest the state violate the Commerce Clause. This ruling was nothing new, reaffirming precedent set in the 1967 Bellas Hess case that dealt with yesteryear’s borderless marketplace: catalogue sales.

Internet tax advocates are right that consumers are already supposed to pay “use tax” on goods they buy elsewhere and use in their state. They’re also right that use taxes are ineffective, almost as pointless as a tax on black-market sales or drug deals.

Yet, use tax is simply not the same as a sales tax, which is actually owed by companies that legally pass the liability on to consumers. Businesses with a physical footprint in a state remit “sales tax,” and consumers with footprint remit “use tax.”

Forcing sales tax onto out-of-state businesses is a new tax, as currently no company nor individual without a physical presence in a state can be forced to pay or collect consumption taxes. Internet tax proponents purposefully conflate use and sales taxes as an attempted end-run around the physical nexus standard and Commerce Clause jurisprudence.

Already, state legislators and governors have begun to flout the law. More than a dozen states this year pushed measures to circumvent Supreme Court jurisprudence and enact loose interpretations of what it means to be based in a state.

States and spending interests have already put tens of thousands of Internet advertisers out-of-business by claiming that an out-of-state retailer’s ad on an in-state website constitutes a physical footprint. Elsewhere, they’ve violated not just the Commerce Clause but also the First Amendment by trying to force retailers to give the state detailed information about their customers’ purchases.

As GDP plummeted during the past three years, states hiked spending by 8.4 percent. Fiscally responsible federal lawmakers would be hypocritically enabling states to continue profligate spending should they put their fingerprints on a massive $23 billion Internet tax hike.

The last election sent a new Congress to Washington to rein in irresponsible spending and fight efforts to raise taxes, not to sign off on state-level efforts to do the opposite.

Kelly William Cobb is government affairs manager for Americans for Tax Reform and executive director of DigitalLiberty.Net and StopETaxes.com.