By Mark Rhoads
In general, government hates activity it cannot tax or control. Government hates the non-geographic nature of the internet because the reach of web is global but the jurisdictional boundaries of governments have geographic limits. Now there is another new law in California to impose a duty on internet retailers such as Amazon to collect sales tax on purchases they think are made by residents of that state. This greedy and counterproductive tax policy in Illinois and other states is yet another clumsy attempt to make an end-run around a 1992 U.S. Supreme Court decision in Quill Corp. v. North Dakota 504 U.S. 298 (1992).
The decision held that a state cannot force a retailer to collect state or local sales tax unless the retailer has a physical presence in the state that is trying to impose the tax. The decision was made before the internet revolution and mostly dealt at that time with sales from an out of state mail order catalog business to customers located in a state.
The principle behind the North Dakota decision was that a government cannot tax a transaction just because it wants to regardless of any service rendered or not rendered to the seller or buyer. Illinois cannot impose a sales tax on the sale of Dresden dolls in Germany to French customers because Illinois does not provide any services to Dresden or the customers. Nor can Illinois tax a meal served at a lunch counter in Georgia just because a truck driver from Illinois happens to be the customer. There is no nexus (connection) between the state and the activity.
But some politicians such as Sen. Dick Durbin at the federal level and Gov. Pat Quinn or Gov. Jerry Brown and some state revenue departments in Illinois, California, and other states seem to have adopted the attitude that any transaction is fair game if the customer is a resident of the state that wants to tax. The crazy idea is that such customers “belong” to the state no matter if they travel or not and no matter if they have more than one place of residence in more than one state. The idea is that if the billing address of a credit card that is used to purchase something online, or the shipping address is located in Illinois, then that gives Illinois the right to impose a tax collection duty on the out of state retailer which happens to offer goods or services for sale on he net. This premise is ludicrous to start with but state and local governments have sold themselves a myth that they are missing out on millions of dollars in sales tax that would otherwise go to the state if the sale had been made in the more old-fashioned way at a bricks nd mortar store located on the grand mythical “main street.”
Even worse, the states have been able to blackmail large national retailers into doing their dirty work for them with a trumped up allegation that the absence of sales tax on some internet sales gives an “unfair advantage” to Internet retailers over main street stores.
This myth is all nonsense on many levels. First, many transactions on the net have no physical world equivalent at all. The Online retailers are winning more business not because they have an unfair advantage, but because they have earned a completely fair competitive advantage with better price, selection, and service because they chose not to waste their money on huge overhead just to feed the vanity of corporations who wanted large malls and greedy governments who also wanted large malls to feed their limitless appetite for tax money. If the farm remains a farm and is not developed into a mall with a huge parking lot, there is no additional need for government services such as fire and police and local governments have no excuse to keep growing themselves.
The whole contrived debate is fake on another level because most so-called “brick and mortar” stores at the mall or on Main Street, if they want to stay in business, have also developed their own online purchasing web sites. If you live in Illinois and buy a TV screen at the local Target or from Target online, it does not matter to Target as long as they make a sale. But it might matter a lot to a local government that claims the Target store as in its jurisdiction because they were able to tax the sale at the physical store but not one purchased online from an out-of state retailer that has no store in Illinois.
In 1999 I testified to a U.S. House subcommittee that states will have a very difficult if not impossible job in trying to enforce a sales tax for online purchases for several common-sense reasons. Suppose the purchase is strictly digital and not a package that is shipped. You can either buy a CD at a local music store or download a song from the net for a price. But how can a state track all digital downloads of movies, games, or music unless it can monitor all keyboard strokes of every IP address associated with a building located in a state?
What if the purchaser does not pay with a credit card that has a mailing address in Illinois? It would be easy for many people to get a credit card and change the mailing address to a summer home or other out of state address. What if the customer asks for the product to be shipped to an address in another state?
Part of the great myth that states and localities are missing revenue they should get depends on the crazy idea that citizens belong to the state and only one state and the state has the right to tax them in any way imaginable just because they live and not because they get direct service from a government. All that states will really accomplish if they win this contest is to drive more e-commerce overseas because even if they had total agreement among all jurisdictions in the U.S., they still cannot impose a sales tax collection duty on companies overseas who are net retailers.
Sooner rather than later the great myth of missing sales tax money from internet sales will start to fall apart as state revenue departments begin to realize that they are not really missing that much sales tax in the first place and the burdens of trying to collect more will outweigh the benefits. If a retailer is located in Illinois and so is the customer, the retailer already collects sales tax for Illinois if they know the location of the customer.
But the National Conference of State Legislatures (NCSL) and the National Governors Association (NGA) are located in the same office building in Washington, DC. The NGA and the NCSL have concocted ridiculous studies to try to prove that states are missing out on internet sales tax. All the studies depend on the idiotic premise that every sale of any kind that can happen on the Internet would necessarily otherwise also happen in a store on Main Street. Tell that one to vintage book sellers. There is no way that Main Street book stores can find out of print books with the same level of service that online book sellers can. The same holds true for wide selections of merchandise in the national or global market. The internet sales tax idea was folly when it was first put forward ten years ago and it still is but it keeps coming back again and again due to the greed of state and local governments that cannot control their spending.