The Internet Sales Tax: Another Assault On The Constitution

internet-sales-taxIt’s amazing how fast Senate Majority Leader Harry Reid (D-NV) can act when he wants to. Having doodled and dawdled for about four years without even producing a budget, Reid suddenly shed his torpor during the last two weeks in April. So eager was he to pass a bill authorizing state governments to collect tax on interstate Internet sales that he bypassed the normal committee process of holding hearings so senators could examine the pros and cons. The bill was introduced (actually, reintroduced) on April 16, and if Reid had gotten his way, it would have passed already. Opponents barely managed to postpone the vote on it until May 6.

One of the interesting aspects of this bill (known by the Orwellian title of “Marketplace Fairness Act”) is that 27 Republican senators currently favor it. Only 24 or 25 senators currently oppose the bill—a bipartisan combination of senators from the five states that do not have a sales tax, plus some economic conservatives from the Tea Party wing of the GOP, such as Marco Rubio, Mike Lee, and Ted Cruz.

The reason so many senators favor the Marketplace Fairness Act is simple: State governments are desperate for revenue to fund their ever-escalating expenditures, and their allies in the U.S. Senate are trying to help them collect it. Internet sales in the US totaled $226 billion last year, and a revenue stream that large easily becomes a tempting target for big spenders.

Proponents of the tax focus on “fairness.”  They claim that out-of-state online vendors enjoy a competitive advantage against local brick-and-mortar companies that must pay sales tax to their state governments, and that this inequitable situation must be corrected. This is economically ignorant. The whole point of economic competition is that some businesses have competitive advantages over others. This gives consumers choices and they end up buying from the businesses that give the most value for the least money.

There are, of course, two possible ways for state governments to eliminate the existing disparity: Impose the same tax burden on out-of-state Internet-based competitors, or remove the sales tax burden under which in-state businesses labor. The problem with eliminating the sales tax for in-state firms is that those firms consume various government-provided services (roads, courts, state police, perhaps even business subsidies) and it is only right that the businesses pay for those benefits. The problem with initiating taxes on out-of-state firms is: Why should out-of-staters pay taxes to a government when they consume none of the services or wealth transfers provided by that government? Why should they pay taxes to political entities for whom they are not eligible to vote and who are completely unaccountable to them? That is taxation without representation—a major principle for which American patriots fought the Revolutionary War—and there is nothing fair about it (hence, the Orwellian character of putting “fairness” in the name of the bill).

Allowing state governments to begin imposing sales tax on out-of-state businesses is worse than unfair: It’s unconstitutional. The federal government has no such authority. Article I, Section 9, Paragraph 5 on the United States Constitution stipulates, “No Tax or Duty shall be laid on Articles Exported from any State.” Article I, Section 10, Paragraph 2 of the Constitution states, “No state shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports…” The constitution created the world’s first large free-trade zone—the United States of America—and for a majority of United States senators to place expediency above constitutional integrity is unconscionable.

One of the sadder aspects of the move to rush this new form of taxation through the Senate was that supply-side guru, the famous economist Arthur Laffer, quickly jumped on board. Laffer and his supply-side allies deserve great credit for reviving an understanding of how marginal tax rates create incentives for individuals, and for showing how some government taxes are less harmful than others. However, the Achilles’ heel of the supply-siders always has been their tendency to focus more on taxation than on the fundamental economic danger: Government spending. Laffer repeats that error today by endorsing the Marketplace Fairness Act.

Writing in The Wall Street Journal on April 18, Laffer cites data showing that state governments could have garnered at least $23 billion in 2012 by taxing Internet sales. He laments that this “lost” revenue resulted in marginal tax rates being raised. While Laffer is correct that raising marginal tax rates is harmful, he is too quick to assume that state governments will lower them if they gain the power to tax Internet sales. Worse, he doesn’t even attempt to make the case that state governments should spend less as the optimal way to stimulate the economic growth that he wants. When it comes to spending, Laffer takes the road of least resistance and comes down on the side of the status quo—clearly a political decision more than an economically sound one.

Indeed, on an economic level, it is amazing that so many senators feel safe in supporting the Marketplace Fairness Act. Having states add a tax to interstate Internet sales will raise the prices that consumers pay. Of course, that is SOP (standard operating procedure) for government; after all, government’s war against higher standards of living by imposing higher prices on consumers in a multiplicity of ways—e.g., subsidies, quotas, tariffs, business taxes, antitrust law, hyper-regulation, et al. With all those policies, government makes economic goods more costly to consumers.

At the time of this writing, it looks like the expansion of states’ taxing power is a done deal. One can only hope that the Supreme Court will uphold a challenge to the Marketplace Fairness Act’s constitutionality later on. However, in 2009 the Supremes declined to hear a case challenging a Massachusetts law taxing out-of-state corporations that generated sales in Massachusetts. Add to that the contorted verbal gymnastics that were used to uphold the Affordable Care Act last year, and it is hard to feel optimistic about our constitutional rights being safe. It appears to me that federalism is dying and state and national legislators are colluding to extract more money from the private sector.

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  • pierce

    What is so wrong with an internet sales tax?
    Do purchases on the internet get charged a sales tax?
    Are people buying over the internet to avoid paying an sales tax. If that is the case, bring on an internet sales tax. If one can avoid paying a sales tax, then I suppose it is okay, but for the rest of us who don't, won't, or can't buy over the internet, it is a form of tax evasion.
    I have no objection to the tax.

    • candy

      Some states already charge internet sales tax. Not all companies add the charges to purchases so the state tracks them and you can get a state tax bill for years worth of orders,totaling in the thousands of dollars with accruing interest added on.
      IL does this.

      And who do think will be hardest hit by this tax ?
      The elderly and disabled who shop online because they are physically challenged and less able to be mobile.
      What do you care if cripples and old farts can buy everything from food to medication ,adult diapers and toys for their grandchildren on line. Tax evaders,all of em!

    • patron

      Why should we give those scumbag thieves another cent?

      They're already printing and borrowing us into ruin because they are so adapt at destroying the careers of politicians who actually try to make us solvent.

    • objectivefactsmatter

      " If one can avoid paying a sales tax, then I suppose it is okay, but for the rest of us who don't, won't, or can't buy over the internet, it is a form of tax evasion"

      Huh? I guess suicide is also a form of "tax evasion." With voters like you, it will be the only option left to formerly free people.

    • SoCalMike

      We need to stop feeding parasites.
      Thats whats wrong with it.
      We only give them more than 2 TRILLION
      A year but its not enough.
      No amount is ever enough.

    • cap0z1

      The reason the states CANNOT compel businesses located in other states to collect their taxes for them is simple – it is called TERRITORIAL JURISDICTION, which was the result of the American Revolution. Under this gibberish on the web by idiots who do not understand the law or the constitution, is a serious threat to the entire establishment of civilization. If California tries to compel me in New Jersey to collect their taxes, as a matter of law, it is no different than France ordering me to act on their behalf if someone comes to New Jersey or orders something over the internet. It is as a matter of law INDISTINGUISHABLE! Neither has JURISDICTION in New Jersey. – Martin Armstrong

    • Anthony DeStefano

      Please allow me to educate you. What is wrong with any tax? It takes the money out of the pockets of consumers and puts it in the hands of the governments who will waste it. Money in the pockets of consumers stimulates the economy. Not only that, this tax law on internet sales is an administrative nightmare. It is impossible for a small business to survive it. With my store, I would have to register, collect taxes and remit those taxes to about 9,600 taxing entities. It would put me and many other companies out of business. And sales taxes are the most regressive taxes around because they tax the poor at the same rate as the rich.

    • UnpaidTaxCollectors

      Because, residents of one state are NOT subject to the laws of another state. If you purchase something from out of state, that state can't tax you because you aren't a resident or even present to be taxed, your state might ask you to pay tax. And if you are an individual selling something to a resident of another state, that state can't force you to become an unpaid tax collector for that state, they have NO jurisdiction or power over you.

  • http://michellemalkin.com/ wolfeatworld

    ► ► ► STOP STEALING MY MONEY YOU DEMOCRAT MORONS !!!!!!!!!!!!!

    • SoCalMike

      We need to root out the Republican dirt bags in league with the Dems

  • cxt

    Yeah, on this one its a tough call. The author is correct and I tend to agree, but why should some yahoo that lives in another State be allowed to undercut "my" prices because he does not have to pay the same sales tax "I" do?

    Makes little sense.

    Besides ask a store like Best Buy about how many people come in ask a ton of questions, get all the info they can about a product then run off and buy it online to save a few bucks. A company like Best Buy could afford to lower prices IF they didn't pay staff to be avaliable to answer questions in the first place.

    Tough call. Don't really know which way to jump on this one.

    • patron

      Shipping costs more than tax. Local vendors have advantages with instant receipt after purchase and market penetration through service.

      There will be ways to circumvent it, especially with the internet like through barter or alternative currencies.

      If taxes go up, the price will be past onto the consumer, except those who own the souls of Democratic politicians. They can always write themselves into an exemption.

    • Jayson

      If your state taxes you so much that you cant compete with a business 1000 miles away, then it is an issue between you and your state. It is not the fault of the people 1000 miles away who live in a more frugal state. Same as if your property tax or income tax was too high for you to be competitive.

      This would allow states to find ways to tax each other. They could have a big sales tax and then provide "rebates" to in-state business (cronies). This is protectionism and kills free trade.

      Eventually we will all buy online from businesses in Hong Kong, China, and Singapore because we cant enforce a sales tax on them.

  • Raymond Silipino

    Taxing the Internet sales is just another way that gives the "powers that be" an avenue to squeeze more money from an already "tapped out" working person that is attempting to support his family. This would provide more money into the general funds to be wasted on all the give away programs that are so prevalent in this administration. I do not believe that there is a tax the liberals ever disliked. If they want to save monetary resources just abide by the Constitution and stop wasting it on surveys, research, and numerous other reasons attempting to find was to circumvent the Constitution. I recall some years ago that the Grace Corporation was on a crusade concerning the taxes and other income that was being paid to collect money in this Nation. After the "dust settled" and the Company had their say, it was revealed that this multimillion dollar Corporation had not paid any taxes in years, ( this comment is based solely on memory.) It appears that Grace Corp was attempting to divert their lack of taxes by coming down on the public to pay more taxes. We the public are unwilling being led by the incompetent to do the impossible for the undesirable and undeserving! How about capping Executive spending limits on vacations?

  • Spikey1

    "Laffer cites data showing that state governments could have garnered at least $23 billion in 2012 by taxing Internet sales"

    WTF is that math, according to my calculations $226 billion (in internet sales 2012). Times 8% (typical sales tax in many states). Equals $351 million per state (not adjusted for population of the states). On a per person basis it is about $58.00, so even in CA (the most populous state) it is a bit more than $2 billion no where near $23 billion.

    If it is a 10% tax then yes $23 billion would be correct for all the states combined – still a dishonest statement.

    Lets see what this tax will do for CA.
    Debt $407 billion – $2 billion (internet tax) = $405 billion in debt.
    Current Revenue minus Spending = -$79 billion – $2 billion (internet tax) = -$77 billion
    Ca per resident of CA debt = $10,785 with over 4 million of those folk on food stamps so they won't be of much use to squeeze taxes out of.

    Looks to me to be a spending issue, but what do I know I'm just some peon that can actually do math.

  • Brujo Blanco

    The way this is working out this is not really a sales tax. It is a customs tax. Under Maryland law if you make a large purchase out of state you are supposed to pay the. Maryland sales.tax when you return to Maryland. In fact they have sent state agents into Pennsylvania to identify people avoiding the state.tax. Perhaps the Democrats simply cannot tolerate an untaxed activity.

  • Ageofreason

    It seems to me that that the constitution is being treated under the current administration not as law, but as guidelines that may be ignored as the government chooses. It also seems to me that at some point down the road when Americans wake up to the evil machinations of the Obamanazis, lamp posts may come to be used for purposes other than lighting, although certainly for the elimination of an oppressive darkness that has descended upon the land. The only mitigating factor of mob democracy is a constitution that limits power. Not only are those in power subverting the constitution, they appear to have subverted democracy itself through corruption of the electoral process. When the awakening comes it will not be pretty.

  • http://michellemalkin.com/ wolfeatworld

    “Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see that money is flowing to those who deal, not in goods, but in favors — when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that your society is doomed. Money is so noble a medium that it does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.” –– Ayn Rand

  • patron

    "The problem with eliminating the sales tax for in-state firms is that those firms consume various government-provided services (roads, courts, state police, perhaps even business subsidies) and it is only right that the businesses pay for those benefits"

    When big government advocates use a progressive tax code to enforce social justice and then steal funds through graft and misuse of office like paving and plowing their own private driveways it is hardly right or fair.

    Up until the 1950s, most roads were private. Up until the 1920s, most police were private. Bureaucrats then hijack emerging industries so they get their cut.

  • Raymond Silipino

    The main thing that people fail to realize when it comes to taxes at the local level is: they are the very one's that vote for the taxes and once that happens, they will never go away. How many time have you heard of a request for a 1/2 cent tax. Well the Government quit producing the 1/2 cent many , many years ago. How many times has there been a drive for a PENNY increase and you hear all of the sob stories then decide : Well what is a penny? That PENNY equates to 1% of your income! It does not matter what they say or promise about the reason for the request, once it is collected, in goes into the general fund at which point your Penny can be used at their discretion! Continued: part 1 of 2 parts

  • Raymond Silipino

    The next time you hear the request go out for that extra 1% of yor income increase , attend the rate hearings that they must have by law and demand that the cause for the increase is specified and demand a Sunset Clause be established for yor 1%. Meaning that the increase is only valid for a specific time and then it expires and the 1% collected must be used on the specific that the tax was voted for. If the merchants that balk about the internet being non taxed , set up a site on line and you may increase your sales without the tax burden! Part 2 of 2 parts

  • Jayson

    If your state taxes you so much that you cant compete with a business 1000 miles away, then it is an issue between you and your state. It is not the fault of the people 1000 miles away who live in a more frugal state. Same as if your property tax or income tax was too high for you to be competitive.

    This would allow states to find ways to tax each other. They could have a big sales tax and then provide "rebates" to in-state business (cronies). This is protectionism and kills free trade.

    Eventually we will all buy online from businesses in Hong Kong, China, and Singapore because we cant enforce a sales tax on them.

  • UnpaidTaxCollector

    This kind of law is so dead out of the gate it isn't even funny.
    1. The Commerce Clause: Congress can NOT impede interstate commerce like this.
    2. Jurisdiction: No resident of one state is subject to the laws of 49 other states if they aren't present.
    3. Slavery was abolished, in all forms. This amounts to Unindentured Servitude for individual citizens. No state can force a resident of another state to work for them.
    4. Federal Minimum Wage & Workplace law violations: If Congress asserts at least 49 "other" states' right to subject an individual to their laws, that individual would also become an unpaid, under the counter employee, and those states would be subject to follow Federal Workplace Laws and regulations. It's not like your own state asking you to fill out your own income tax form, this is asking you to become an unpaid tax collector for a state you don't reside in, and may have never set foot in. The minimum wage and overtime claims from this kind of legislation could be enormous. The Department of Labor couldn't blow you off saying the law doesn't apply to you, after Congress has in effect forced you to become an unpaid employee of those states.

  • Daniel

    While I agree on having a level playing field, I don’t think that the Marketplace Fairness Act does that. I am a strong supporter of the amazing document that we are governed by. The constitution takes president over any law and if changes in society have made it unfair then the founders of this great
    document provided for the ability to change it.

    To me it seems like the supreme courts rulings left open the question of Section 9 stating congress can pass tax laws but as always they need to be constitutional and I am sure it will be challenged. I immediately thought that Article I section 9 forbids this but it isn’t that simple. While on the face of it you might think that Section 9 forbids any tax but an interesting point is that by exclusively stating “articles exported” and not saying anything about “articles imported” is it stating that the state sending the merchandise cannot tax it but the state receiving it can? This distinction would also cover the taxation without representation issue as the one paying the tax is the importer and is represented by the state implementing the tax.

    Article I Section 10 seams to allow congress to let states impose a tax on things imported but the tax would then need to be sent to the US treasury. I doubt that that is the intent of any member of congress. While almost nobody pays the use tax that many states have it seems that the treasury could send a bill to the state for whatever they collect over the cost of collecting it.

    I still think the act itself is bad policy and feel that in most cases shipping cost alone more than levels the playing field. I am still unsure of its constitutionality and while it might be constitutional to charge the tax is it constitutional to make
    the seller collect it.