American Elephants

Tax Hungry States Are Going After Internet Retailers by The Elephant's Child

The rise of internet retailers is changing the world of retailing. There are still lots of customers who want to see the product in person, or in the case of clothing—try it on. For clothing and shoes, buying on the internet gets pretty iffy unless you reliably fit a standard size. But for the states, sales and use taxes are a very big deal,

The Commerce Clause “gives Congress the power to regulate trade “among the several States.”

The state of Alabama is openly defying the U.S. Supreme Court in an effort to squeeze millions of dollars of tax revenue from businesses beyond its borders. Tax officials in Montgomery are insisting that out-of-state firms must, effective Jan. 1, collect and remit sales and use taxes if they annually sell over $250,000 in tangible goods to Alabamans.

This unconstitutional tax grab cuts to the heart of the Commerce Clause, which gives Congress the power to regulate trade “among the several States.” Alabama’s regulation directly contravenes the Supreme Court’s 1992 ruling in Quill v. North Dakota. In that case, the court held that North Dakota could not require an out-of-state office-supply company to collect sales taxes because the firm had no offices or employees there.

To get around that, Alabama’s revenue commissioner, Julie Magee, is putting forward an untested and suspect legal theory: The state claims that if its residents buy more than $250,000 a year from a remote business, then the seller has an “economic presence” and should be treated the same as a brick-and-mortar shop in Mobile or Birmingham.

That will be headed back to court. Online retailers, or catalog retailers have three options— they can assume that since the new regulation from Alabama violates Quill they can disregard it, in which case they would face tax assessments and audits from Montgomery. They can comply with the regulation and start collecting Alabama’s taxes, or they can simply quit selling their products in Alabama.

I have worked in the head office of a major retailer who sends out millions of catalogs and has stores in most states, and simply pays taxes in every state, for if they don’t have a store there they probably will soon. In the current climate, many chains are closing unprofitable stores, including Walmart, the nation’s largest employer.

Lots of catalog companies have gone out of business, as have many retailers who do maintain a physical presence. Retail business changes with the economy. But proposals like Alabama’s hit small online retailers particularly hard. Rep. Bob Goodlatte (R-VA) proposes focusing tax collection on the seller’s location. A small online retailer would pay taxes only from the state where it actually operates.

Congress needs to legislate, or tax-hungry states will attempt to overturn the Supreme Court Quill decision by regulatory fiat even if it circumvents the legislative process. It’s complicated, but a very big deal for online retailers. Amazon is working hard on the delivery issue, trying to cut down the time it takes to get a package to a consumer, in order to make ordering online more attractive. And not just delivery by drones. There is plenty of room for a cooperative effort to be fair to everybody, including the customers and the states.

I order from small online retailers who do not have a physical presence in my state. I’ve seen way too many of my favorite small retail shops go out of business. Successful retailing is hard, and not many businesses thrive for a very long time, especially in a climate of heavy governmental regulation. It’s easier to find something new to tax, or a new tax to impose, than it is to be a very good manager of changing economic conditions in your own state.

The battle between government and business has gone on since time immemorial, but everyone is better off when governments recognize that economic growth doesn’t happen in the government sector. A good business climate benefits everyone.

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