What matters more – that states have limited ability to export taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burdens and disrupt the national economy with a patchwork of taxes and compliance costs – or that identical items be equally taxed no matter where they are purchased? Particularly with sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es, states have been determined to stamp out tax competition and dream up new ways of raising revenue in hidden, indirect ways.
Standing in their way is a 1992 decision by the U.S. Supreme Court called Quill Corp. v. North Dakota, which reaffirmed several earlier decisions. There, the Court held that a state cannot force a company to collect that state’s sales taxes from consumers, unless the company has either property or employees in that state. This “physical presence” rule restrains state power, which otherwise would drift toward taxing everything everywhere, disrupting interstate transactions with death by a thousand cuts.
States have never accepted the legitimacy of the Quill decision or its predecessors (Quill itself was a case brought to defy those earlier rulings), and efforts by the Streamlined Sales Tax Project (SSTP) to make state tax systems simpler have not made significant progress. There are still thousands of sales taxes, they are still not aligned to zip codes (although businesses who sign up for the SSTP aren’t held liable if they get it close enough), similar products are still taxed differently within states, and too many states tax business-to-business transactions. Because of this lack of progress, Congress has been unwilling to authorize states to extend the reach of their sales taxes beyond their borders, as Congress can permit.
So, the SSTP is exploring going back to the courts, hoping that a different U.S. Supreme Court will rule differently. From John Buhl at Tax Analysts (subscription req’d):
The Streamlined Sales Tax Governing Board is looking into challenging Quill if Congress does not take action within the next year on a bill to authorize states to collect taxes on remote sales.
The board’s Executive Committee discussed the idea at an October 6 meeting in Indianapolis before directing its executive director, Scott Peterson, to arrange for outside counsel to discuss the option.
“Obviously, the governing board and the Executive Committee are still pursuing federal legislation, and we are committed to that,” said governing board President Jerry Johnson, vice chair of the Oklahoma Tax Commission.
But Johnson acknowledged that states are still anxious about making progress with the Main Street Fairness Act, H.R. 5660. Although there is no timetable for when governing board states may decide to initiate legal action, Johnson said the governing board will consider other options for remote sales tax collection authority if H.R. 5660 does not pass in the coming lame-duck session or early in the next congressional session.
The Main Street Fairness Act (why do laws have names like that nowadays?) is unlikely to pass absent significant progress by SSTP on simplification. The bill hardly levels the playing field, since it requires online and out-of-state retailers to collect thousands of sales taxes based on where customers are located, while brick-and-mortar retailers need only collect one sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on where the retailer itself is located. At the same time, businesses face a quandary, since a brokered SSTP agreement is preferable to a reversal by the Supreme Court with no concessions for business.
The Supreme Court told the states in 1992 that sales taxes couldn’t extend beyond state lines because they were too complex. They’re just as complex today so that ruling should stand. It’s always tough to predict what courts will do, but I’d be surprised if they bought the argument.Share