Pennsylvania Dreams of Taxing Beyond Its Borders

December 21, 2009

Pennsylvania officials are complaining that the state “loses” $300 million a year because they can’t force out-of-state Internet companies to collect sales taxes on transactions, on the grounds that they exploit the market despite not being present:

“They should be paying the tax,” said Sharon Ward of the Pennsylvania Budget and Policy Center. “But they essentially created a loophole in which they claim they have no presence in the state, and therefore they don’t need to collect the tax.”

Not paying taxes because you’re not in a state isn’t what any serious person would call a “loophole.” I wonder if Ms. Ward files tax returns for every state her words reach via the Internet?

Generally, a state can turn a business into a tax collector only if the business has employees or property within the state. For example, Internet retailer Amazon.com sells merchandise nationwide but has employees and property in only a few states. Only those states can constitutionally force Amazon to collect taxes from third parties, such as sales taxes on purchases. (Elsewhere, states can and do impose use taxes on the purchase of goods and services where sales tax has not been paid.)

Why? Three reasons. First, states cannot extend their taxing power past geographic lines or else individuals and businesses risk multiple taxation and ambiguous rules. Second, there are over 8000 sales tax jurisdictions in the United States, each with their different and ever-changing rates, bases, and rules, and strict compliance with them is very difficult. Third, sales taxes are taxes on consumption and should therefore be paid by the user where the product is consumed. Changing the rules so that taxes are imposed instead where the product is sold undermines this justification of sales taxes.

States are scrambling to find easy revenue nowadays, but adopting a nexus law is anything but easy revenue. To the extent such laws extend a state’s taxing power beyond its borders to hit companies with no property or employees in the state, it raises serious constitutional questions. The litigation will be tied up for some time, and adopting such a law sends the message that a state is looking to fleece out-of-state businesses and harm interstate commerce instead of making the hard decisions about cutting spending for or raising taxes on its own residents to pay for the programs they want.

More on the octopus-like spread of Amazon taxes here.

Read our report explaining why Amazon taxes are unwise and unconstitutional here.


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