For decades, one of the thorniest issues in all of state government has been how to be even-handed in the tax treatment of merchants who sell from within state borders versus those who market online from other places in the world. Unfortunately, an approach urged recently by the Pennsylvania Senate does not provide that balanced solution.
Under a provision added by the Senate to H.B. 542—a tax reform bill the state House passed in May—any intermediary that even merely facilitates a commercial transaction with a Pennsylvania resident would be required to collect and remit taxes, even if it lacks physical presence in the state. Legislation of this type adopted in other states has been held unconstitutional and should be rejected largely for that reason.
The bill incorporates provisions used by other states in laws that were drafted to challenge U.S. Supreme Court precedent, but this approach is both costly and unlikely to be successful. In South Dakota, a federal court recently enjoined a similar tax-remittance law that sought to extend the state’s taxing power beyond its borders, just as H.B. 542 proposes. Ultimately, by empowering Pennsylvania to collect taxes from businesses with no physical presence in the state, the rule immediately would draw the commonwealth into the potentially expensive and bitter cycle of litigation seen in other states. It’s a cycle unlikely to yield a positive result, because decades-old Supreme Court precedent makes clear that state taxing powers stop at the border’s edge.
This bill also imposes an undue burden on online marketplaces like eBay and Etsy, which are merely virtual storefronts that allow millions of small businesses to reach customers across the globe. H.B. 542 ignores the actual 21st century marketplace and creates new tax and compliance burdens not just on big internet companies, but also on craftsmen and entrepreneurs. It would be like making the King of Prussia Mall or the Millcreek Mall liable for all the sales taxes owed by its tenant stores anywhere in the country. Of course, that would be absurd.
Setting aside the bill’s obvious unconstitutionality, it would be decidedly unwise for Pennsylvania. By contributing to the erosion of borders as effective limits on state tax power, it will encourage poorly governed, tax-heavy states like California, New York and Illinois to unleash their aggressive tax collectors on Pennsylvania businesses and marketplace facilitators. Pennsylvanians could be subject to audit and enforcement actions in states all across the country in which they have no physical presence.
Moreover, citizens of the commonwealth largely oppose this tax grab. In a 2014 poll conducted by R Street and the National Taxpayers Union, overwhelming bipartisan majorities of Pennsylvania Republicans, Democrats, conservatives, moderates, liberals and independents answered “yes” to a question about whether “the internet should remain as free from government regulation and taxation as possible.” Moreover, by a margin of two to one, respondents said they opposed “federal legislation that changes how states collect sales tax from internet purchases.”
The U.S. Constitution was written to replace the Articles of Confederation, in no small part, due to the latter’s failure to prevent a spiraling interior “war” of states who could assert tax and regulatory authority outside their borders. While the Constitution’s Commerce Clause and subsequent jurisprudence make clear that taxing power must be limited by state borders, this bill seeks to wipe those limits away. The General Assembly should reject this law and avoid the ensuing legal tangle.
Image by Andriy Blokhin