From the Archives: Tax Foundation Research on Taxation of Interstate Commerce, 1966 and Today
July 12, 2011
For 74 years the Tax Foundation has maintained a record of credible and thorough research. To be sure, many of our past findings are still applicable to the issues that federal and state governments deal with today. As such, we continue to augment our website archives with the vast wealth of studies and briefs that we have completed over seven decades. This post is the first in a series that will highlight some of these key studies from the past and emphasize how their findings are still quite apropos today.
In recent years there has been an outbreak of state attempts to impose an “Amazon” Tax on online retailers. An “Amazon” tax forces all online retailers with so-called instate “affiliates” (or contractors) to collect sales taxes on all transactions made within that particular state. The issue inherent within this tax concerns the extent to which states can tax out-of-state businesses and thus interfere with interstate commerce—or rather, interfere with the relatively state-tariff absent, free-trade system that functions between the states.
As a 1966 Tax Foundation Government Finance Brief, “Current Problems and Issues in State Taxation of interstate Commerce,” underscores, however, this debate over state taxation of interstate commerce is nothing new. Indeed, as this historical brief suggests, this is the same debate cycling throughout American politics, but simply repackaged; it is a discussion spawned from states’ attempts at expanding their power to tax.
By the early 1900s, states had begun to modify their corporation income tax laws (taxes on the income of instate companies) to impose taxes on corporations “[who] did no more than solicit orders in the state[s] through resident and non-resident salesmen.” (p. 1 of 1966 study) During the intervening period, several states pushed to force out-of-state vendors to collect sales and use taxes on items shipped from other states; U.S. Supreme Court rulings in 1939, 1959 and 1960 would actually hold several of these taxes to not be impediments on interstate commerce.
Similar to today, the gradual increases in the scope of state taxation vis-à-vis interstate commerce, certainly with help from the Supreme Court, created an uproar in both the American business community and the Congress and thus in 1959 led to the passage of the Interstate Income Law. The law, which is still in force, stipulates that a state may not impose an income tax on a business that either only solicits sales orders in the said state or just uses instate “independent contractors” to sell product. Though this law only covered income taxes on firms, of particular note with this bill is that it also authorized a congressional study to outline the effects of the new series of state income, sales and use taxes on out-of-state firms as such.
Unsurprisingly, the congressional study’s findings mirror some our own findings today with respect to the “Amazon” tax. The study found that the thousands of state and local taxes “[made] it…difficult, if not impossible, to determine whether tax liability exist[ed] for particular firms in particular states.” (p. 3) Significantly, the study asserted that the various state and local sales and use taxes created an enormous and disproportionate series of compliance costs (costs involved with having to comply with certain government stipulations, like a company being forced to collect sales taxes) for firms involved in interstate commerce.
What’s more, the study found that states and their locales were woefully short of any substantive efforts in better integrating their various tax systems to allow for more consistency and thus lower compliance costs—several states and their adjoining locales were not even using the same definitions for specific taxes.
Altogether, the study surmises that the sheer mass of the taxing jurisdictions and their variance in tax stipulations on out-of-state firms, assuming all laws were being followed, would create an untenable financial situation for interstate companies. Perceivably, compliance with the tax laws in the myriad of jurisdictions would have put interstate business at a grave disadvantage next to instate brick and mortar, but such burdens were not being incurred because “[firm] compliance was incomplete and inaccurate.” (p. 3)
Given our findings, it seems that nothing has changed in the past forty years. In an effort to level the playing field for instate brick-and-mortar, states like California and Louisiana would subject online retailers to the untenable task of collecting taxes from several thousand unstandardized sales tax jurisdictions—to say nothing of the burden of having to deal with such variation on a nation-wide level.
We find that like in the 1966 brief, the task of collection, as it is to be enforced, would create a largely disproportionate amount of compliance costs that brick-and-mortar, who simply pay a single sales tax, would not have to pay. Moreover, there has been very little palpable attempt at integrating the tax structures or tax definitions of the states or their respective regions.
All told, we find that the same problems arise and yet states still insist on ignoring the evidence—in the political mosaic that is American politics, however, it is certainly not surprising that we are having the same debate some forty years later.