August 8, 2012

Only Largest Companies Could Survive Internet Sales Tax Plan

Adam Thierer

Senior Research Fellow
Summary

State and local governments already possess the unambiguous right to tax Internet sales that originate within their own borders, but taxing extraterritorially across their own borders violates the Constitution and would require the blessing of Congress. Federal lawmakers should not cede them that power.

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State and local governments already possess the unambiguous right to tax Internet sales that originate within their own borders, but taxing extraterritorially across their own borders violates the Constitution and would require the blessing of Congress. Federal lawmakers should not cede them that power.

Those advocating greater state-based taxation of online, interstate transactions promise to simplify the crazy-quilt of overlapping state and local sales taxes imposed by over 7,000 jurisdictions. They claim that this would lessen the enormous compliance burdens that would result from new Internet taxes. Yet, the so-called "Streamlined Sales and Use Tax Agreement" they offer as a solution runs over 200 pages and remains riddled with loopholes and complexities that could burden vendors. That is tax "simplification" that only the largest companies could handle.

Many of the smallest mom-and-pop operators would struggle to comply. Greater industry consolidation and less competition and consumer choice could be the unfortunate result.

Worse yet, this effort would discourage vigorous interstate tax competition and make it easier for governments to raise sales tax rates on consumers. In essence, what the "Streamlined Sales and Use Tax Agreement" proposes is a state-based national sales tax cartel for the Internet.

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