R Street Institute

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Congress should act to stop states from battling over online sales taxes

by Clark Packard
May 22, 2017
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issues: Economic Mobility
originally published in The Hill
In recent years, a multitude of states have attempted to impose sales taxes on purchases made over the internet and to set regulatory standards that would apply to out-of-state producers, despite U.S. Supreme Court precedent barring such practices. Recently introduced federal legislation could offer a commonsense solution to what has been a growing problem.
 
Just recently, Indiana Gov. Eric Holcomb signed into law a measure to subject sales made over the internet to the state’s sales tax, regardless of where the seller is located. In Wyoming, the state house approved legislation this year that would require any remote seller with more than $100,000 annually in gross sales to the state to pay sales tax. In South Carolina, the state senate passed a bill in February requiring out-of-state remote sellers to register with the Department of Revenue so that they may be held liable for the state’s sales tax.
Likewise, states continue to try to set regulatory standards that apply when out-of-state companies sell products into the state. California, for example, is trying to require out-of-state egg farmers to use a certain size cage for chickens if they want to sell their eggs in the Golden State. This sort of ad hoc tax and regulatory policymaking poses enormous constitutional and economic concerns.

In its 1992 decision in Quill v. North Dakota, the Supreme Court held that, before a state may levy a sales tax on purchases made from a company, the company in question must have a physical presence in that state. This decision was grounded in sound constitutional principles of federalism and Congress’ plenary authority to regulate commerce between the states. For instance, the Quill court noted that Congress could choose to grant states the ability to levy taxes beyond their borders, but thus far, it hasn’t exercised that power.

The implications from the court’s quarter-century-old decision are far-reaching. For example, if a state had the power to levy sales taxes on companies located in other states, it necessarily also would have authority to send its auditors out of state to examine that company’s books. This would have appalled the designers of our constitutional framework. Allowing states to set standards that apply to companies in every state would begin the process of eviscerating federalism as we know it. Yet spendthrift states with ever-growing appetites for more resources and busybody state regulators increasingly push the envelope in order to chip away at the Quill decision.

In order to stop state efforts to tax and regulate beyond their borders, Rep. Jim Sensenbrenner, R-Wis., has introduced a promising new piece of legislation, the No Regulation Without Representation Act of 2017. By codifying the Supreme Court’s Quill decision in federal statute, the bill would make clear that Congress respects its own Commerce Clause authority and that it will force states to respect each other’s borders, as well.

Since the early days of our republic, Americans have benefited immensely from our federalist system, in which states are generally free to set the rules of the road for their own citizens and businesses, but their ability to influence other states’ citizens and businesses are largely circumscribed.

Should Congress fail to enact something similar to the Sensenbrenner bill, states will continue to try to tax and regulate beyond their own borders. This will increasingly impede economic growth and balkanize the regulatory environment. Stakeholders will increasingly turn to the courts to try to solve their problems.

Congress can stop this unnecessary litigation by passing the No Regulation Without Representation Act. It should do so quickly in order to stop the regulatory and taxation overreach that has grown in recent years.

Image by Muhamad hamizi sharif

 

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