A taxing problem

The Marketplace Fairness Act, which is now back on the political agenda, violates a fundamental American principle.

In December 1773 the Sons of Liberty threw quite a lot of tea into Boston Harbor. They did so in protest against a new tax that had been imposed without their consent. “No taxation without representation” was their rallying cry — a principle on which the subsequent American Revolution was based.

Sadly, the passage of history has muted the volume on what was once an emphatic exclamation, turning it into little more than a faint echo. Nowhere is this truer than in Congress and among the leaders of several states, all of whom greedily eye any, and every, new source of tax revenue.

One such source comes from allowing states to tax sales made by companies outside of their jurisdiction. Despite the rise of e-commerce, which has made the revenues involved more lucrative, this is not a new issue. As far back as 1967, when the sate of Illinois attempted to force Missouri based mail order firm National Bellas Hess to collect and pay Illinois taxes, states have yearned for a way to bolster their coffers.

The National Bellas Hess case made its way to the Supreme Court, which overturned the Illinois ruling as blatantly illegal via a violation of the Constitution’s Commerce Clause. In its judgement it noted: “The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements.”

The court also echoed the founding principles in accepting that a company without a physical presence or tangible connection to a state was not obliged to abide by the tax statues of that jurisdiction. National Bellas Hess had no such connection to Illinois and so was ultimately not subject to its tax laws.

For a long time, the ruling of the Supreme Court became a fair and accepted benchmark governing interstate sales taxation. However, the rapacity of some state governments and their national politicians attempted to cast this reasonable and rational code to one side with the so called Marketplace Fairness Act. The original bill, which was first presented in 2011, ultimately came to nothing and failed in a vote in 2013, but after a hiatus it is now back before Congress.

The essence of the bill does precisely what the founders of the nation objected most strongly to: force businesses and the individuals running them to abide by the tax laws of states where they have no presence, connection, or interest. In essence it seeks to codify into law the very objection the Supreme Court made when ruling in favor of National Bellas Hess.

The practical implication of the legislation is that a business based in one state and selling remotely would be obliged to collect the sales tax of every other jurisdiction it sold into. It would also, on request, be subject to an audit by those jurisdictions, and would be answerable to the tax laws of the same. That’s 45 sets of rules for the 45 states that impose sales taxes, right? Wrong. It’s 9,998 sets of rules for the 9,998 different sales tax jurisdictions that exist across the country. Texas alone has over 1,500 jurisdictions.

The burden of managing so many different sets of rules would be enormous. It adds a ridiculous level of unnecessary complexity to businesses already feeling the strain of a competitive and challenging environment. It creates an enormous web of those unjustifiable local entanglements which the Supreme Court complained of in 1967.

The law also holds internet retailers to a higher standard than their physical counterparts. Anyone who doubts this should spend a Saturday in southern New Hampshire, a state with no sales tax, where the parking lots of malls are crowded with vehicles sporting Massachusetts license plates; the residents of the state, which imposes a 6.25% sales tax, keen to save a handful of dollars on their purchases.

Those same residents are supposed to declare purchases made out of state on their annual state tax returns, and pay a usage tax equivalent to the sales tax that would have been imposed if they had purchased the item within their own jurisdiction. Such a request is legally valid, but it is completely unenforceable, annoyingly burdensome, and morally objectionable — so hardly anyone bothers with it.

That states cannot enforce existing laws, and that no politician is willing to force their constituents to pay up for fear of being voted out of office, may well be frustrating. However, it does not make it right for them, or Congress, to violate that sacred principle of America’s founding: no taxation without representation!

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