South Dakota Tax Law Creates Problems With No Solutions

South Dakota aims to raise new tax revenue from out-of-state businesses by prosecuting those who do not cooperate with the state’s sales tax law — flaunting Supreme Court precedent and constitutional law.

No matter the consequences to growth, innovation, and consumer choice, state officials from the Mount Rushmore State and across the country are convinced that collecting the small amount of online sales tax not collected today is the answer to all their problems.

For more than 200 years, the Commerce Clause of the US Constitution and several US Supreme Court decisions — the most recent coming in a unanimous decision in 1992 — have protected out-of-state businesses from other state tax collectors. At the same time, the Constitution and Supreme Court protected out-of-state businesses from the burden of collecting and filing sales taxes for over 10,000 tax jurisdictions where the business lacks a physical presence.

But, some states think that the US Constitution has an expiration date and simply want to ignore the sections they don’t like. At the same time, these states want to saddle small businesses with big burdens.

At a debate last month in Washington, D.C., Utah State Senator and National Conference of State Legislatures(NCSL) President Curtis Bramble all but admitted that states are trying to change Constitutional law because pro-tax legislators don’t have the backbone to demand that their constituents pay use taxes that are already due.

Sen. Bramble said:

Do you vote for me? …. That is the issue … Any policy is in a political arena to get passed. Any solution, whether it is politics in Washington with [House Judiciary Committee] Chairman Goodlatte and [House Oversight and Government Reform Committee Chairman] Chaffetz, and at the state level, you have to consider, is it a realistic proposal that will have any chance of solving a problem?”

Too bad Sen. Bramble and NCSL legislators are pushing a legislative “solution” that creates many more problems than it could possibly solve.

On its face, collecting taxes for out-of-state purchases may not seem like a big ask. But when you realize that small businesses could be forced to understand the tax obligations of more than 12,000 tax jurisdictions in 46 states, the scope of the solution greatly overshadows the problem at hand. The compliance costs could easily reach into the tens of thousands of dollars for a small online retailer. Some could be put right out of business.

In reality, the “problem” is actually solving itself. Nearly all of the 20 largest Internet retailers collect sales tax for all of the sales tax states. Uncaptured sales tax revenue represents less than one percent of total state and local tax revenues.

If a small online retailer is successful, it’s bound to expand its physical presence into other states ultimately enabling states to reap the sales tax windfall they seek. But if that retailer is hamstrung by massive compliance costs at the onset, the chances of becoming a sales tax collector are grim.

NetChoice, along with the American Catalog Mailers Association have jointly filed suit against South Dakota’s unconstitutional new sales tax law that ignores 200 years of federal doctrine and the burdens faced by small businesses.

State legislators should focus on streamlining the complex tax systems they have created. That’s a lot simpler than wasting taxpayer money on trying to re-write the US Constitution and decades of US Supreme Court opinions.

Steve DelBianco is executive director of NetChoice, a trade association of e-commerce businesses and online consumers.

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