Guess Who's Back? The Internet Tax

| by Institute for Policy Innovation

In a rare bit of good economic news, it seems that tax receipts in the states rose substantially last year. In fact, all 50 states reported an increase in tax receipts, at an average increase of 8.9 percent.

This is, of course, good news for state budgets, which needed some good news, because so many states have spent themselves underwater on outrageous pay and benefits for state employees and failed economic development projects.

But they’re not satisfied with increases in revenue based on growth of their economies. No, they want more, and are trying to get more via the so-called Marketplace Fairness Act, even if it involves trampling on Supreme Court precedent.

For decades the Supreme Court has made clear that to require a tax from any entity, that the entity must have a “presence” in the state, usually a store or shipping center or even a team of salespeople.

So ordering from a catalogue, when the merchant had no physical presence in the state, has never triggered an obligation to collect taxes (though the taxes have always been due and payable by the purchaser). And today e-commerce logically comes under that same rule.

The Marketplace Fairness Act claims to allow states to simplify their own tangled mess of tax rates, jurisdictions and collection points, and then empowers them to force merchants from out of state to collect the taxes for them.

But states are already free to simplify their tax systems without any action by the federal government, and they were directed by the Supreme Court nearly 50 years ago to do so if they wanted such authority.

So why have the legislation? To attempt to bypass the physical presence constitutional requirement, which state revenue authorities have despised for a generation, dismissing it as a “loophole.”

But Supreme Court rulings requiring physical presence are not “loopholes”—they are firm (and re-affirmed) constitutional law.

The House Judiciary Committee is scheduled to hold a hearing on the legislation on July 24. In the Senate a much less transparent plan is afoot as pro-taxers, such as Senators Durbin (D-IL) and Enzi (R- WY), are trying to avoid a debate on the merits by adding the legislation as an amendment to the Small Business Jobs and Tax Relief Act, attaching a tax increase to legislation claiming to reduce taxes.

Haven't we already seen enough damage done to the Constitution with legislation that raises taxes?