The Corner

Economy & Business

How the Constitution Limits State Taxes

Must a company have a physical presence in a state for that state to require it to collect taxes? The Supreme Court is considering that question, which has grown more important as online sales have taken off. The Competitive Enterprise Institute has submitted an excellent brief arguing that the answer is yes, at least in the absence of congressional authorization for states to ignore that limit.

The CEI brief tries to overcome a tricky problem: While there is a solid constitutional argument for a default rule that limits states’ taxing power to their territory, and precedent is on that side as well, the constitutional argument and the precedent don’t sit well with each other. The former relies on constitutional provisions that the Court has largely interpreted away, from the compact clause to the import-export clause; the latter on the “dormant Commerce Clause.”

CEI’s answer: If the Court is going to rethink its precedent on extraterritorial taxation, it should rethink all the relevant precedents, and rethink them in a way that accords with the Constitution’s actual structure and purposes.

The brief makes two of its best points in passing. The first is that the fact that states that wish to tax outside their jurisdictions have banded together to create taxing arrangements by itself demonstrates that what they are trying to do impinges on commerce among the states. The second is that whether letting states have the taxing power many of them seek would be efficient ought to be beside the point for the justices. Arguments about efficiency “are little more than efforts to drag this Court into an inappropriate policy-making role and have no constitutional warrant. Just as efficiency is manifestly not the point of the separation of powers, technical efficiency likewise is not the point of federalism.”

I hope the justices listen.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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