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States Making Predictable Grab for Revenue via Online Sales Taxes

Fallout from the 2018 South Dakota v. Wayfair Supreme Court decision, which allowed remote sales tax collection from online purchases, has begun and The Wall Street Journal editorialized on the sad state of affairs yesterday. The Competitive Enterprise Institute spent twenty years articulating the advantages of tax competition and warning of the repercussions of allowing states to reach outside their borders and collect taxes from businesses located entirely outside that state. While the court was persuaded by assurances of practical ease in remitting these taxes, the justices in the 5-4 majority largely ignored the constitutional principles at stake. 

Advocates of the expanded tax authority placated the court with promises of technical tools for sellers to comply with the web of 10,000 distinct sales tax jurisdictions they were about to unleash on businesses, they pointed to the South Dakota law’s exemption for business with less than $100,000 in sales, and to the (chronically impotent) Streamlined Sales Tax Project. But technical tools haven’t solved compliance headaches, revenue-hungry states are moving away from small business exemptions, and the Streamlines Sales Project has never looked less compelling.

Practical nightmares for online sellers aside, the court’s blessing of taxation without representation and the flipping of states from competing for citizens and commerce to colluding with each other to prevent healthy tax competition are the real sins. The negative consequences of this rejection of horizontal federalism and healthy competition amongst states have yet to be fully realized and are likely very difficult to correct.

This mess should serve as a cautionary tale for expanding cumbersome government designs into new dynamic economic situations. Dragging outdated taxing schemes and regulatory red tape into the next generation of commerce will hurt innovation and consumers. CEI predicted the harmful consequences of doing so with online sales taxes and it’s no comfort that we told you so.