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Taxation: Not How, But Whether by Jerry M. Young on 11/14/99 of Sutherland Institute Topic: Taxation | |
| I If the groups fighting for power to levy sales tax on Internet commerce (e-commerce) are successful, the delicate Constitutional balance which gives Congress sole authority to regulate interstate commerce may be ripped into shreds. It was the chaos between states, when they wrangled for every penny in dues and tariffs as goods crossed into and out of their individual domains, that caused the Founding Fathers to abandon the Articles of Confederation. They composed a new document to form a "more perfect union," the U.S. Constitution. The Articles of Confederation had allowed each state to manage commerce between itself and other states even as 13 separate nations might do. In contrast, the Constitution gave Congress the sole power to regulate interstate commerce. That single provision was one of the great principles that bound this country together into the greatest economic force in the world. The need for this principle has resurfaced in discussions of whether and how Internet transactions should be taxed. Roughly two years ago, a number of congressmen were seriously speculating about taxing the Internet. In response, Rep. Christopher Cox (R-Calif.) and Sen. Ron Wyden (D-Ore.) joined forces in a pre-emptive strike by proposing legislation that would have set a permanent ban on taxing Internet commerce, including simple access to the Internet. It came close to passage. Shocked at their defeat, those still dreaming of big tax revenues from the Internet rallied to force a compromise. A year ago this month the compromise bill became law: "The Internet Tax Freedom Act." The final form called for a three-year moratorium on all "new" taxes on Internet access and on e-commerce. It also authorized a commission to study the subject and ordered a report by April 2000. That's where the current controversy is raging. The commission is almost equally split between members that favor taxation and members that seriously favor no taxes at all. There appear to be a couple of swing votes on the commission who could go either way. Dean Andal, Vice-Chairman of the California State Board of Equalization and one of the anti-tax members of the commission has submitted a legislative proposal that is under serious consideration by the commission. If passed, that legislation would go far to establish, once and for all, a jurisdictional standard that would set precise descriptions on what constitutes interstate commerce and what does not. That achievement alone would eliminate much of this hassle. Utah Governor Mike Leavitt, as chairman of the National Governors Association (NGA), is a member of the commission, and has been consistently in favor of taxation. The arguments of his group and the other pro-tax factions center around how taxes might be collected rather than whether they should be collected at all. The pro-tax faction claims that we must levy a tax on Internet sales because it's only "fair" to main street retailers who are losing business to "remote" sellers who don't have to pay rent and charge sales taxes. They portray e-commerce as a force that will one day break down and crush brick-and-mortar retail companies. This argument does not acknowledge the fact that many Internet retailers are also brick-and-mortar retailers who benefit greatly from their Internet presence. Even this fact is beside the point to pro-taxers, who invoke "use tax" laws as justification for taxing Internet sales. Five years ago use taxes referred one thing. Today in Utah and other states it means something entirely different. "Sales and Use Tax" regulations used to apply solely to businesses. Every Utah business receives a tax number that exempts it from sales tax on what it buys. In this way, the product is only taxed when it is sold to customers, not each time it passes through a middleman. But since all businesses consume some products, the "use" tax applied to items businesses buy wholesale and use within their own operations-when the business is the end user. A couple of years ago the scope of the use tax was expanded in Utah. The state announced that from that time forward all Utahns were liable for sales tax on everything they purchased and "used" in Utah. Suddenly commercial elements that had been protected by congressionally controlled interstate commerce provisions found themselves under the taxing jurisdiction of Utah. These elements, generally called "remote" businesses, include mail order catalogs, direct mail houses, telephone solicitors, and now Internet retailers. Instead of assuming that taxes are owed on e-commerce sales, states should first clarify whether they can levy taxes in these situations or not. The anti-tax side argues that Internet commerce is protected under principles of interstate commerce. These same arguments have been winning cases before the U.S. Supreme Court for decades. For example, if a company does not have a physical presence (like a store or warehouse) in a given state, it is not required to collect sales taxes on behalf of that state. By extension, sales over the Internet would be just as protected as sales done by other remote businesses. Hard as it might be on those in power in the various states, the principle of interstate commerce that was established by the Founding Fathers must remain intact. States have no right or authority to regulate commerce between themselves and other states, and taxes are one of the most powerful means of regulating commerce. When states try to levy taxes on commerce that crosses state borders, they threaten a return to the very conflict that ultimately caused the abandonment of the confederation of states. ##### Jerry Young is the Director of Communications for the Sutherland Institute, a Utah public policy research institute. Permission to reprint this article in whole or in part is granted provided credit is given to the author and to the Sutherland Institute. For more information about the Sutherland Institute and/or to order additional copies of this article, call the Institute office, (801) 281-2081, or write: The Sutherland Institute 111 E. 5600 South, Suite 202 Murray, UT 84107. Fax: (801) 281-2414; e-mail: sutherland@utah-inter.net. This article is available electronically at: www.sutherlandinstitute.org. Nothing written here is to be construed as necessarily reflecting the views of the Sutherland Institute, as an attempt to aid or hinder the passage of any legislation, or as an endorsement of any candidate or initiative. *********************************************************** Daniel B. Newby Director of Operations & Development dnewby@utah-inter.net The Sutherland Institute: Shaping the Future of Utah Independence Square 111 East 5600 South, Suite 202 Murray, Utah 84107 Phone: (801) 281-2081 Fax: (801) 281-2414 Website: www.sutherlandinstitute.org If you have questions, or would like to receive membership information, please use the contact information above. We welcome your questions, comments, and suggestions. *********************************************************** |
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