As chairman of the powerful Finance Committee and senior senator from a non-sales tax state, Montana’s Max Baucus is uniquely positioned to protect both American consumers and his home state’s businesses from out-of-state politicians imposing new, onerous sales taxes – in other words, to preserve the principle of “no taxation without representation.” He should do so.
Last year, Internet tax hike proponents ran into opposition from a coalition of small businesses and anti-tax activists when they tried to secure Congress’ blessing for a state tax cartel. This year, they may be back for another try.
The Internet is far from the sales tax-free zone it’s often purported to be. Today, a Supreme Court decision prevents states from collecting sales-tax revenues from companies with no physical presence within their borders. But state and local governments can tax in-state sellers regardless of their method of delivery to consumers – online, through the mail or in person.
For example, if a New York resident buys a product online from a company in California, New York may not collect sales tax on the transaction unless that Golden State vendor has a store, warehouse or other facility that qualifies as “nexus” in the Empire State. However, if California wanted to tax that in-state vendor, it’s perfectly free to do so – but it has chosen not to do so.
So why don’t states just tax businesses within their own borders and skip the legislative heavy lifting? Quite simply, because politicians would rather tax residents in other states who can’t vote them out of office than levy taxes on businesses and consumers at home to whom they’re politically accountable.
Constitutionally, state tax collectors need Congress’ permission to reach across their borders and tax businesses in other states. Enter the Streamlined Sales and Use Tax Agreement, a coalition of state officials who have been lobbying Congress for that taxing privilege.
Under the SSUTA’s state tax cartel, our same hypothetical purchase would now involve the California retailer calculating and remitting sales tax to the state of New York. This is truly “taxation without representation.” Moreover, it provides zero value to the retailer who will never benefit from services his taxes fund.
As a representative of a no-sales tax state, Baucus should be particularly wary of turning Montana businesses into tax collectors for 46 other states. Montana business owners will have no political say in these remote taxes and will not benefit from the services they fund. A small retailer in Billings might have to pay to states where he has customers, but he shouldn’t expect to see New York or California fire trucks if his shop catches fire.
Then there are the administrative costs. There are more than 9,600 distinct taxing jurisdictions across the country, each with its own rates, tax holidays and exemptions. The compliance costs for Montana businesses – some of which perhaps located in Montana to avoid such burdens – will be significant.
Happily for Baucus, the decision to oppose the SSTP cartel should be an easy one. By blocking the SSTP legislation, he’ll be doing right by the whole country, fulfilling his national role as Senate Finance Chairman while protecting the sovereignty of non-sales tax states like his own.
Schemes like the SSTP tax cartel lessen the downward pressure on tax rates by removing the healthy tax competition between states. The “simplification” that comes with SSTP’s scheme means a general ratcheting up of taxes because extending low rates, exemptions, and tax holidays is exactly the opposite of what state and local tax collectors want.
Institutionally, Baucus has an obligation to protect the free flow of commerce among the states. Allowing remote taxation by the states is the antithesis of this principle. State budget problems are not his concern, but even if they were, he should sleep better at night knowing that the projected revenue from expanded online sales taxes is less than 1 percent of total state and local revenues.
In describing the healthy tension between the federal government and the states in protecting their citizens, Alexander Hamilton said, “If one encroaches on their rights they will find a powerful protection in the other.” Let us hope Baucus takes this opportunity to bolster that protection.
Jessica Melugin is an adjunct policy analyst at the Competitive Enterprise Institute.