P.J. O’Rourke once snarkily noted that the American tax code was clearly designed by “A” students, as “every April 15, we have to pay somebody who got an A in accounting to keep ourselves from being sent to jail.” Unbeknownst to most Americans, the bevy of complicated regulations promises to get worse this week, if proposals moving through a handful of state legislatures are successful. Unfortunately, Nebraska is among the states leading the charge, threatening to make life particularly difficult for those who do business online.
On the heels of a similar bill passing the Wyoming House of Representatives, the Nebraska Legislature’s Revenue Committee will hold a hearing Friday to consider a measure that, in essence, seeks to expand the state’s taxation power nationwide. Legislative Bill 44, the “Remote Seller Sales Tax Collection Act,” would force online vendors who sell to Nebraskans to collect Nebraska sales tax if they conduct more than 200 transactions or do more than $100,000 of business in the state. This would apply to all online vendors, including the overwhelming majority that boast neither a physical presence within Nebraska’s borders, nor in-state employees.
While $100,000 may sound like a lot, it’s not just Wal-Mart-sized behemoths that would be caught up in this rule. Data from Statista.com find the average value of an online shopping trip is just $77. A vendor conducting 200 online transactions in Nebraska could be doing just $15,000 of business in the state. Moreover, a late 2014 survey of 200 private online marketplace sellers active on sites like eBay and Amazon found about 70 percent of eBay sellers and 74 percent of Amazon sellers had annual revenues of less than $100,000, with 9 percent of Amazon vendors and 34 percent of eBay vendors making less than $10,000 in online revenue.
In short, this initiative applies to the overwhelming majority of Americans doing business online. It is far more likely to wring mom-and-pop operations reselling thrift store treasures on eBay than it is to punish imagined fat cat Silicon Valley types swimming through Scrooge McDuck-style pools of undisclosed wealth. Ironically, those consumers likely to be affected most, should the initiative succeed, are those in more rural areas—like considerable swaths of Nebraska—who rely on internet purchases to mitigate a dearth of brick-and-mortar retail options. They would subsequently see the prices they pay for online goods rise.
The political appeal of the proposal is obvious. The imagined ability to access new streams of revenue from sea to shining sea understandably intrigues even the most stoic state legislator. This is especially true when the responsibility to enforce the decree rests on the shoulders of nebulous “remote sellers” (i.e., small businesses and private citizens). But it’s a train of dominoes those same lawmakers may quickly regret initiating.
As R Street Institute Senior Fellows Andrew Moylan and Steven Greenhut astutely noted when commenting on Wyoming’s comparable initiative earlier this week: “By contributing to the erosion of borders as effective limits on state tax power, the bill will encourage poorly governed, tax-heavy states like California and New York to enact similar bills that would unleash their aggressive tax collectors” on Nebraska businesses, with Nebraskans who do business online potentially “subject to audit and enforcement actions in states in which they have no physical presence.”
Small retailers who rely on the internet will be expected to play tax collector or face the consequences, should they fail to correctly comply. The spread of such initiatives promises to have an innovation-stifling effect, as upstart online businesses face the daunting prospect of navigating an ever-expanding labyrinth of divergent state tax requirements. How individual transactions are handled will differ wildly on the basis of whether or not the buyer happens to be located in a state that has decided to try its hand at collecting state taxes nationwide, and what, precisely, a given state expects in terms of compliance.
It is with good reason that traditional brick-and-mortar retailers, who still account for 92 percent of retail sales, tax customers on the basis of the state in which their store is physically located (known as “origin-based” taxation), rather than taxing on the basis of the state in which each individual customer lives (the so-called “destination-based” taxation being considered this week by the Legislature). Aside from the commonsense appeal, limits on states’ abilities to tax beyond their own borders are firmly established by Supreme Court precedent. Though a tempting prospect to gain a few points in the polls, Nebraska legislators will quickly find this deceptive political panacea is a poison pill, should other states follow suit and give Nebraska a taste of its own medicine.
Image by Paul Stringer