The GOP’s Internet Tax
Republicans have spent the last year cutting taxes and regulations, which hasn’t been easy. But now some Members of Congress want to blunt their handiwork by passing an online sales tax. Yes, they actually believe this would be good policy and politics.
A large faction of House Republicans are pressing GOP leaders to attach legislation to the omnibus spending bill that would let states collect sales tax from remote online retailers. South Dakota Rep. Kristi Noem’s legislation, which has 50 co-sponsors, would let some 12,000 jurisdictions conscript out-of-state retailers into collecting sales and use taxes from their customers. A bipartisan companion bill in the Senate has 27 co-sponsors.
The Supreme Court’s 1992 Quill decision forbids state and local governments from requiring businesses without a “physical nexus”—that is, property or employees—to collect sales tax. States complain that this restriction puts brick-and-mortar stores at a competitive disadvantage and reduces government revenues. All political protectionism is local.
But online purchases make up less than 10% of all retail sales, and only a sliver is untaxed. Seventeen of the 18 largest retailers on the web by 2016 had already begun collecting sales taxes on all of their customers’ purchases. The exception was home-goods retailer Wayfair.
Big retailers like Amazon and Walmart have the resources to comply with disparate tax rules across thousands of jurisdictions. Small businesses don’t. In New York City, all clothing—save jewelry, costumes and some athletic equipment—that costs less than $110 is exempt from sales tax. Chicago taxes bottled water, soda, candy and groceries all at different rates.
Contrary to political lore, sales tax revenues have been increasing steadily in states with healthy economies. Over the past five years, Florida’s sales tax revenues have grown 27%. South Dakota’s are up by nearly 30% since 2013. This is noteworthy since politicians from states without income taxes complain that Quill could impel them to pass one to raise revenue.
As for brick-and-mortar stores, most nowadays sell over the web too. Those that are struggling—e.g., Sears and Toys “R” Us—are overleveraged and didn’t adapt fast enough to changes in consumer behavior or tastes. People who shop online generally do so for the convenience rather than incremental tax savings, which can be negated by shipping costs.
Nonetheless, Quill has become a bogeyman of politicians on the left and right. In his Direct Marketing Association v. Brohl (2015) concurring opinion, Justice Anthony Kennedy echoed their laments that Quill was “now inflicting extreme harm and unfairness on the States.” His opinion emboldened states to pass a patchwork of “Kill Quill” bills that are essentially gutting it even without a change in federal law.
Twenty or so states have adopted “click-through” taxes to hit remote retailers that have contracts with local businesses. In 2016 South Dakota invited the High Court to revisit Quillby extending its sales tax to out-of-state sellers. Other states have followed. The Court will hear that case, Wayfair v. South Dakota, next month, and most expect Justice Kennedy to join the liberal majority to overturn Quill.
But some Republicans warn that the Court could divine a new standard from whole cloth that could create confusion. Worse, the Court could enable broader taxation and regulation of out-of-state businesses. This is what many states want to happen. The Justice Department has argued for a “virtual” presence standard that would make a hash out of the Commerce Clause, which gives Congress the authority to regulate interstate commerce.
Ergo, many Republicans say Congress must intervene. Yet the legislation that they want to add to the omnibus spending bill next week won’t necessarily moot the case or rein in errant Justices.
If the status quo is doomed, then a better alternative is House Judiciary Chairman Bob Goodlatte’s compromise with California Democrat Anna Eshoo, which would establish a mechanism for states to collect taxes from out-of-state retailers through a national clearinghouse. His bill would simplify compliance for small retailers and prevent states from harassing out-of-state businesses—thus preserving the constitutional principle of no regulation without representation.
The real reason some Republicans in Congress are now rushing to pass their kill Quill bill is that they want to get credit for axing the Court’s 1992 decision with retailers at home. But stuffing such an important policy change inside a huge spending bill with little debate would be a political scam. Raising taxes on small business and consumers won’t be a good look for Republicans in November, nor an inducement for investment and growth.
Appeared in the March 16, 2018, print edition as ‘The GOP’s Internet Tax.’