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No Taxation Without Representation, Except on the Internet



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There was never any doubt in my mind that the moment that Internet giant Amazon.com caved to pressure and agreed to start collecting tax from its out-of-state consumers, we would be a step closer to losing the fight over “no Internet tax without representation.” Amazon caved a few months ago.

Thankfully, there are a few brave freedom lovers out there who still believe that citizens shouldn’t be taxed by governments in which they do not have a political voice and who are willing to fight against taxation without representation.

Senator Jim DeMint from South Carolina is one of them. In this morning’s Wall Street Journal, the senator explains why it is a terrible idea for Washington to agree to subject online retailers to 10,000 local tax jurisdictions. The pressure that lawmakers are subjected to is understandable: State budgets are in the red and Main Street vendors are complaining about unfair competition. However, it doesn’t make the new potential tax arrangement right. The senator explains:

The Marketplace Fairness Act recently introduced in the Senate would require online retailers to collect and pay sales taxes to states where they have no physical presence or democratic recourse. Overstock.com, eBay and the like could have to pay sales taxes to any state from which an Internet user placed an order, even if the company’s headquarters, warehouses and sales staff are located entirely in other states.

Such online sales tax proposals are taxation without representation. The proposed federal law tells businesses that there is no escape from the clutches of tax-hungry politicians. That concept is antithetical to our federalist system, which promotes competition among our states for the best economic policies.

#more#In a very good new paper, CEI’s Jessica Melugin explains how it would work:

Taking the same real world example of a Virginia resident buying a book online from an Oklahoma retailer, it would look very different under the SSUTA scheme.  Virginia would be able to collect tax from the Oklahoma-based retailer despite the Oklahoma retailer having no physical presence in Virginia. Never mind that the company being taxed has absolutely no voice in what items Virginia decides to tax or at what rates it does so. And never mind that the company doesn’t benefit from any services Virginia provides with its tax dollars.

Even more alarming is a scenario where both the seller’s state and the vendor’s state may collect tax on the same transaction. The SSUTA agreement permits states that join and simplify their tax rates to periodically change their sourcing rules. This opens the door for double taxation.  The Internet Tax Freedom Act currently prohibits this, but that protection expires in November 2014.

And yet, as she rightly notes, the violation of the nexus principle and the new revenue won’t bring much relief to the states:

In any case, consumers will experience remote taxation as a tax hike.  It’s true that use taxes are already on the books (though, again, seldom collected and remitted), but that technicality of tax law will be cold comfort to consumers paying more online for their purchases.  Extracting more money from taxpayers to put in state and local tax coffers is, in plain fact, the objective of this legislation.  The National Conference of State Legislatures itself has pointed out in a letter to Senators, “[i]n 2012, states will collectively lose an estimated $23.3 billion in uncollected sales taxes from out-of-state sales.”[i]  While that’s not enough money to make up for state and local budget shortfalls, it’s more than enough for voters to take notice. 

And regardless of the name of the bill, the Marketplace Fairness Act, you can kiss fairness goodbye. 

Melugin offers an alternative: Origin-based taxation. She isn’t alone. Ramesh Ponnuru embraced the idea few months ago in his Bloomberg View column and so did my colleague Adam Thierer and I in a 2003 paper called “The Internet Tax Solution: Tax Competition, Not Tax Collusion,” written for the Cato Institute.

The whole thing is here.



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