The Leaflet: States Debate Internet Taxes
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.
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.”
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