No online taxation without representation
Since our nation’s founding, the idea of no taxation without representation has been a guiding principle. State taxes are collected to pay for essential governmental services, such as infrastructure, education, sanitation and many more. Since these services are for the benefit of citizens, it is entirely within the jurisdiction of state and local governments to collect taxes to pay for them.
The Commerce Clause of the Constitution ensures residents are taxed only by their own state by vesting the authority to regulate interstate commerce with the federal government. Inherent in this authority is a prohibition on states from interfering with interstate commerce. In other words, no citizen should be subject to taxation without receiving the benefits of their government. That, however, is exactly what some states are attempting to do.
A sales tax is not in fact a tax on businesses, but instead, a tax on consumers for the purchase and use of the goods. For the sake of convenience, brick and mortar businesses are required to collect this tax on the government’s behalf. This point of sale tax poses no constitutional issues because the purchase within a state necessarily involves a sufficient nexus to the state to justify taxation.
Exclusively online retailers, on the other hand, frequently sell products to people in other states who intend to use those products in their own states. In many cases, imposing a sales tax on an in-state retailer would mean taxing a citizen of another state who has little or no connection with the taxing authority. This is an explicit form of taxation without representation.
Any state law requiring online retailers to pay state taxes would force consumers to give money to state governments that they have no representation in or receive no benefits or services from. It would also disproportionately favor large states, which could attract more online retailers and then collect taxes nationwide.
In 1992, the tension over taxation between out-of-state retailers and state governments came to a head in Quill Corp v. North Dakota. The Quill Corporation — a catalogue retailer based in Illinois — received a notice from the state of North Dakota claiming the company owed use tax payments for sales made to North Dakota residents. Because the company had no physical presence or employees in the state, Quill Corp. denied the claim. The case ended up before the United States Supreme Court, which ultimately sided with Quill, ruling that a taxpayer must have a physical presence in a state to owe a sales or use tax.
In Quill, the Supreme Court provided specific requirements to demonstrate a significant nexus thereby justifying the collection of taxes. These requirements, such as owning or leasing real or tangible property or employing workers in a state, set a national standard for future tax collection cases. It has also served as an important taxpayer protection for more than two decades. But as e-commerce continues to grow, states are passing new laws that would widen the nexus standard and increase their revenues.
In places like South Dakota and Alabama, state governments are increasingly ignoring Quill and passing laws that require online retailers to pay state taxes, based on the dollar amount of annual sales in the state. Tennessee, Colorado and Louisiana are all following suit.
In an effort to uphold the principles established in Quill and to protect online retailers and consumers, I introduced H.R. 5893, the No Taxation Without Representation Act of 2016. If passed, this bill would keep government overreaches in check by limiting the ability of states to impose a use tax or sales tax on remote online sellers and would codify the standard the Supreme Court set in Quill. It would also reduce burdensome government regulations, helping online retailers conduct business more efficiently and cost-effectively, while ensuring that only residents of a state are held responsible for state tax obligations.
The passage of H.R. 5893 is crucial because states should not have the ability to tax non-citizens, plain and simple. Forcing use and sales tax on internet sales is unconstitutional and would slow the growth of the e-commerce industry, one of the few bright spots in our economy over the past decade, as well as needlessly knock American consumers where it hurts the most — their pocketbooks.
No taxation without representation is a mantra that speaks to the founding principles of this nation and is as true today as it was at this country’s conception. This legislation is a step in the right direction and will go a long way toward ensuring fairness in state taxation and upholding the standards set to protect American businesses and consumers.
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