Exclusive: Dick Durbin’s national internet sales tax

by Dan Horowitz | Posted on

Anytime someone in Washington, DC utters “fairness”, we all know it is anything but fair. For several years, Sen. Richard Durbin (D-Il.) has been attempting to create a new tax burden on American consumers. Unbelievably, during a continued slowed economy he is pushing a regressive – and de facto national – sales tax which would disproportionately impact ordinary working Americans.

But hope for freedom lingers. Though Sen. Durbin and his allies believe that more taxes and more government are the solution, even they acknowledge that the Constitution stands between them and this new revenue source. The Commerce Clause does not allow states to require companies to collect sales tax if the company does not have a location in that state. The Supreme Court has reinforced this several times, most notably in Quill Corp v North Dakota. In 1992, Quill sold office supplies through catalogs and used telephones to take customer orders, the company had no presence in the state of North Dakota and thus the Court affirmed Quill was not obliged to collect sales tax for North Dakota.

Senator Durbin has staked his new revenue claim on the ability of Congress to create an exception to the Commerce Clause. If Congress passes his legislation, which the Court has also supported, Sen. Durbin would unleash every state and locality to create taxation without representation on every out-of-state business.

Setting aside the need to encourage entrepreneurs, innovators and small businesses across the country, ignoring the common sense opposition to yet another regressive tax, Sen. Durbin chooses to find new taxes wherever he can. Conservative policymakers should not be gulled into thinking this is anything but a vote for a new tax.

The new sales tax would compel small businesses across the country to either abandon online sales or shoulder the dramatic increase of compliance costs. Sen. Durbin will force a small business in Decatur, Illinois to answer to the bureaucrats in Sacramento, California and in every one of the 9,600 jurisdictions which levy sales taxes across the country. Exposing struggling entrepreneurs to compliance costs, random audits and conflicting filings across the country when competing jurisdictions inevitably claim a piece of the same sale.

Some online sellers (Amazon and Apple’s iTunes) have found that as their companies have shipping facilities or data centers in nearly every state, thus it is easier for them to simply collect tax in every jurisdiction – whether they have a location in the state or not – and states receiving taxes not due are happy to accept these “overpayments”.

Obviously states and localities have the right to impose sales and other taxes on the commerce within their own border, but the question here is whether states – or the inevitable next step, other countries – have the right to tax Americans for commerce taking place outside of their borders. The Supreme Court has in fact already addressed this question.

Further, Sen. Durbin’s legislation has a number of curious missing issues which would be necessary to fully address the idea of “fairness” if such was truly his goal. The most concerning – and often ignored – is the elimination of past liability. Several members of the trial lawyers guild have made a point of traveling from state to state, contracting with sympathetic tax offices to sue online sellers for “lost revenue” from transactions which occurred before the jurisdiction was able to collect the tax. Again, this will be yet another unfair burden on America’s small businesses. These “nuisance suits” will garner many settlements – by businesses both small and large – as the estimated costs to resist will greatly overshadow simply paying the legalistic extortion.

Sadly, just yesterday the U.S. Senate moved one step closer to passing this radical expansion of taxing authority. I can only surmise Republicans in Congress think they can tell voters that this isn’t really a vote to increase taxes. None the less, our taxes will go up. Sadly, Republicans seem to be missing the bigger picture here. When businesses are forced to pay out-of-state jurisdictions taxes, the phrase “Taxation without Representation” applies. And a tax increase is still a tax increase.

Dan Horowitz is the former Assistant Administrator for Policy at the U.S. Small Business Administration.
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