Skip Navigation

The Leaflet: States Debate Internet Taxes

June 9, 2016

States are currently debating whether Internet purchases should be subject to a sales tax. In South Dakota, a court case is making headlines that could allow the state to collect sales taxes from online purchases.

tax documents

States are currently debating whether Internet purchases should be subject to a sales tax. In South Dakota, a court case is making headlines that could allow the state to collect sales taxes from online purchases. Brick-and-mortar retailers claim that it’s unfair that Internet companies aren’t required to collect sales tax for not having a physical presence in the customer’s state. Opponents of the tax argue the burden on businesses and consumers associated with the Internet sales tax make it a poor policy decision.

In a 2015 Daily Signal article, Congressional Correspondent Philip Wegmann discusses the origins of the Internet sales tax debate writing “In the 1992 case Quill v. North Dakota, the Supreme Court ruled that a state can’t do that. Instead, taxation is tied to geography, the court ruled: A business incurs the burden of collecting sales tax only if it has an actual physical presence in that state.” This important principle is called “nexus.”

Some states currently have laws that require online retailers to collect sales taxes if they have a store, warehouse or subsidiary in-state, or if they contract with a local business to advertise their products. Conversely, some states have no sales tax at all. The U.S. Small Business Administration – an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns – claims on its website that not every state and locality has a sales tax. The site states “Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not have a sales tax. In addition, most states have tax exemptions on certain items, such as food or clothing.”

The Heartland Institute’s Government Relations Director, John Nothdurft, argues in a Heartland Policy Tip Sheet, “Allowing states to collect taxes on transactions occurring outside their borders is fundamentally unfair and threatens basic economic liberties. The persons paying and collecting the taxes do not have an opportunity to vote or otherwise participate in the government process that creates the tax or sets its rate. This "taxation without representation" is compounded by the fact that those paying the taxes receive no public goods or services in return for their payment – "taxation without benefits.”

One challenge with state Internet sales tax is determining which sales tax to charge. Writer and Journalist Clare Curley discussed the potential burden of a federal law on Internet sales tax in a 2015 National Federation of Independent Business article stating “If the new law had gone into effect, online retailers would have had to make adjustments for every new state in which they sell a product or service, including costs like installing new software.”

In a recent Research & Commentary, Heartland Senior Policy Analyst Matthew Glans argues states should not implement a state Internet sales tax stating, “Instead of forcing out-of-state businesses to serve as government tax collectors state legislators should implement a sales tax system based on where the product was sold, known as an origin-based tax system. This would truly level the playing field, with both online and bricks-and-mortar retailers paying the same tax.”

What We’re Working On

Register Today For Our Emerging Issues Forums!
The Heartland Institute is hosting two Emerging Issues Forums (EIF) in 2016. The first will be held in Chicago, Illinois on August 7–8, immediately before the National Conference of State Legislature’s (NCSL) Legislative Summit. The second will be held in Orlando, Florida on December 15–17. The Emerging Issues Forum brings together elected officials, policy analysts, and government affairs professionals from across the country. You will hear from leading free-market experts as we explore innovative solutions to the top public policy issues that will face the states in 2017 and beyond. Registration to the event is free for elected officials, spouses and legislative staff and travel scholarships are available. Space is limited so please register today!

Budget & Tax
Research & Commentary: Work Requirements Are a Necessary Component of Any SNAP Reform Plan
Senior Policy Analyst Matthew Glans and State Government Relations Manager Logan Elizabeth Pike examine in this Research & Commentary new efforts by Congress to add work requirements to the Supplemental Nutrition Assistance Program (SNAP) food stamp program. One of the biggest problems with SNAP and the reason it grew so quickly during the recent recession is the lack of any requirement that recipients actively seek employment. “States should have an immediate requirement for recipients to engage in work-related activities to be eligible for TANF and food stamps. States should also reform assistance programs that trap low-income Americans in poverty by disincentivizing work.” Read more

Education
Research & Commentary: North Carolina School Vouchers Expansion
A bill that would substantially increase the size of North Carolina’s school voucher program was filed in the North Carolina Senate on May 10. The proposal would fund an additional 2,000 grants annually in the state’s Opportunity Scholarships voucher program, starting during the 2017–18 school year. This would continue until the 2027–28 school year. The expansion would cost an additional $10 million annually, topping out at $135 million in 2027–28. During the 2015–16 school year, North Carolina spent $12 million on the program, which enrolled more than 2,500 children.

Under the program, each student receives a maximum voucher amount of $4,200, which can be used for “tuition, transportation, equipment, or any other items required by qualifying private schools.” Students are eligible for the Opportunity Scholarships program only if their family income is 133 percent or lower of the federal free- and reduced-price lunch program. Students must also have attended a public school during the previous semester to be eligible. In this Research & Commentary, Policy Analyst Tim Benson notes that polling shows North Carolina voters view educational choice favorably, and argues vouchers give all families a greater opportunity to meet each child’s unique education needs. Read more

Energy & Environment
Research & Commentary: GMO Labeling Laws Are Harmful and Unnecessary
Vermont’s genetically modified organism (GMO) labeling law is set to take effect on July 1, 2016, making the Green Mountain State the first in the country to have an active GMO labeling law on the books. Proponents of GMO labeling laws believe genetically engineered (GE) food could possibly be dangerous for human consumption and that labeling products help consumers make better informed, healthier decisions about their food choices. Because creating two sets of labels – one noting GMOs, one not – is costlier to businesses than having one uniform label, Vermont’s law could become a de facto national law. In this Research & Commentary, Policy Analyst Tim Benson points to a recent National Academies of Sciences, Engineering, and Medicine study which finds GMOs are perfectly safe to eat. Benson notes these findings are backed up by hundreds of independent studies, and the Academies’ opinions on the safety of GMOs are shared by the World Health Organization, the American Association for the Advancement of Science, the American Council on Science and Health, the American Society for Microbiology, the Royal Society of Medicine, the French Academy of Science, and the Union of German Academies of Science and Humanities, among many others. Read more

Health Care
Research & Commentary: Missouri Should Move Away from Maintenance of Certification
Senior Policy Analyst Matthew Glans writes in this Research & Commentary about the growing problems created by overzealous and expensive maintenance of certification (MOC) programs and Missouri’s need to disallow these programs. Glans argues MOC’s new requirements are excessive, costly, time-consuming, and unnecessary, “While a certain degree of certification will always be necessary, physicians should not be required to pass through a quagmire of costly and expensive tests that may be unnecessary. Oklahoma provides a model other states can follow to end MOCs completely; Missouri legislators should follow Oklahoma’s lead and end this unnecessary burden on practicing physicians.” Read more

From Our Free-Market Friends
The Buckeye Institute Releases New Healthcare Report
A recent report released by The Buckeye Institute shows how states can grow and improve their health care markets in 2017. Executive Vice President and Chief Operating Officer of The Buckeye Institute Rea S. Hederman Jr. and Senior Research Fellow of the Mercatus Center Brian Blase offer ways states can respond the Affordable Care Act in Health Care Challenges That States Should Prepare to Face in 2017. The authors encourage Ohio and other states to reform their "certificate of need" regulations that prevent health care suppliers from growing or building new facilities, expand "charity care" so that health professionals can provide free services to low-income residents in different parts of their state, and promote "telemedicine" for doctors to diagnose minor illnesses and prescribe medicine online to more rural residents. Read more

Article Tags
Taxes Government Spending
Author
Nathan Makla is a former state government relations manager for the Government Relations Department at The Heartland Institute.