The National Governors Association and the National Council of State Legislatures have proposed a plan that is essentially a quid pro quo to let states tap tax revenues generated over the Internet. The twenty-six states that currently support the Simplified Sales Tax essentially want to trade simplification of sales tax collection and compliance rules for merchants’ "expanded duty to collect" sales taxes.⁹ Although supporters of the Streamlined Sales Tax are correct in arguing that such a plan would not create "new" taxes on the Internet, the plan actually expands states’ existing powers of taxation. This is so important that the U.S. Constitution specifically requires Congress’s approval for such an expansion of power. On its web site, the National Governors Association outlines its proposal:

1. One sales tax rate may be applied per state. States that charge a sales tax would need to establish a method of distributing the appropriate share of revenue to local jurisdictions because sales taxes formerly imposed by cities and counties would now be reimbursed from the state. States would continue having the option of not imposing sales taxes
2. Definitions of goods and services subject to taxation must be uniformly established across state lines. States will be able to choose whether or not to tax specific items.
3. The most probable approach to administration of sales taxes under this system would be to encourage the establishment of a network of independent third-party organizations responsible for remitting taxes to the states. Vendors would use a software package pre-approved by the states to calculate taxes due from purchases based on the tax rate of the state where the item is to be sent. These so-called "Trusted Third Parties" would then electronically remit collected taxes to each state’s collection agency.¹⁰

The basis for determining the appropriate tax rate would likely be the 9-digit Zip Code. One or more organizations (such as credit card networks) could potentially assume the role of "Trusted Third Party." By assigning the appropriate tax rate to each 9-digit Zip Code, tax rates would adjust both for state collection purposes and for remission to local jurisdictions. This would ensure that cities and counties get their share of sales taxes.

From the taxpayers’ perspective, the Streamlined Sales Tax would be the worst possible approach to e-commerce taxation. This plan would tax all forms of e-commerce and inevitably lead to a de facto national sales tax imposed by a state-run cartel. By allowing states to tax their residents’ out-of-state purchases, the Streamlined Sales Tax, if imposed, would also undermine interstate competition by making it impossible for consumers to escape bad tax policy by shopping in jurisdictions with lower sales taxes.¹¹ This would give lawmakers carte blanche to raise sales taxes with the knowledge that consumers are unable to "vote with their feet."

A potential byproduct of the Streamlined Sales Tax could be the replacement of healthy tax competition among the states with an unhealthy form of interstate tax warfare. By allowing states to tax out-of-state vendors while exempting their own companies from sales taxes on goods or services exported out of state, lawmakers would have the incentive to engage in malicious tax warfare by offering tax breaks to in-state businesses while simultaneously ratcheting up taxes on out-of-state products.

The Streamlined Sales Tax represents a shift back to interstate commerce as it prevailed under the Articles of Confederation. Instead of maximizing the benefits of free trade, loosely tied states engaged in tax warfare. The U.S. Constitution was created in large part as a response to this problem, as the Founding Fathers wisely placed interstate commerce under federal jurisdiction.

There are many specific passages within the U.S. Constitution that directly assert federal control over interstate commerce. These passages appear to prohibit a multi-state compact as proposed under the Streamlined Sales Tax. Among them are the "Commerce Clause" (Article 1, Section 8) which gives Congress the power to regulate commerce among the states and Article 1, Section 10, which explicitly outlaws multi-state compacts unless they receive specific approval from Congress. In addition, because the plan authorizes states to levy taxes on items imported into that state, Article 1, Section 9, which states that "no tax or duty shall be laid on articles exported from any state," is violated. With an array of direct violations of the U.S. Constitution, one might think that the states’ ambitious plan would be doomed to failure. Perhaps that may be the eventual outcome; however, the forces behind expanding government can never be underestimated.

The final aspect of the states’ plan that should concern taxpayers is its reliance on "Trusted Third Parties" in the collection and distribution of sales tax revenues. Most notably, in order to collect and levy taxes, consumers would have to give out personal information that is not currently collected in routine retail transactions.¹² If the Simplified Sales Tax were adopted for e-commerce, fairness would dictate that the same system be applied to all retail purchases. In that case, merchants would be forced to determine the buyer’s place of residence in order to charge customers at the correct tax rate. It is unclear how this plan would apply to foreign citizens or cash transactions, but it is obvious that this radical plan for overhauling the sales tax is not very "simplified" at all.

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