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New Report: The Economic and Legal Problems with Internet Sales Taxes

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WASHINGTON - Today, the Competitive Enterprise Institute (CEI) released a new study analyzing the economic downsides and legal problems with Internet sales taxes on the state and federal levels. With Congress poised to consider a similar tax in the Marketplace Fairness Act during this lame-duck session, lawmakers should preserve states’ rights to compete and not give into big-box retailers and their lobbyists.

The study, by CEI associate director of technology studies Ryan Radia and CEI senior attorney Hans Bader, challenges the constitutionality and benefits of “click-through” nexus taxes, where states tax remote Internet retailers who use in-state Internet-advertising partners or “affiliates”. The authors cite how the adoption of nexus taxes resulted in Overstock.com pulling out of its affiliate business in New York, while in North Carolina, many retailers cut ties with affiliate marketers in that state.

"Congress should reject legislation like the Marketplace Fairness Act (MFA) because it would take more money out of consumers’ pockets, discourage entrepreneurs, and harm small businesses. It would create a sales tax cartel punishing Internet retailers,” said Radia. “With more than 9,600 U.S. sales tax jurisdictions, an Internet sales tax would significantly increase compliance costs for Internet retailers, undermine interstate competition, and result in a de facto tax hike. This is bad policy for states and the economy.”

KEY POINTS:

  • Nexus taxes extend far beyond companies with a “physical presence” in the taxing state, and run contrary to a 1992 U.S. Supreme Court decision in Quill Corporation v. North Dakota. Internet retailers and affiliate marketers who are burdened by nexus taxes in at least 12 states who have enacted this type of legislation have standing to sue under the Dormant Commerce Clause.
  • The MFA would give congressional approval to allow states to tax remote sellers, overcoming the Commerce Clause’s limits and resulting in a costly burden for Internet retailers of all sizes.
  • Requiring Internet retailers to collect and remit taxes on sales to residents of the roughly 9,600 U.S. sales tax jurisdictions would create substantial compliance costs, especially in states that assess differing tax rates on various types of goods.
  • The MFA would undermine healthy tax competition among states by reducing the incentive for Internet retailers to consider state and local sales tax rates when deciding where to locate offices and warehouses. 
  • The MFA would result in a significant de facto tax increase on much of the U.S. population, as states are unlikely to reduce tax rates regardless of any revenue increases.

 View the CEI report, From Overstock to Overtaxed: The Dubious Legality of State Click-Through Sales Taxes